Why Does a Company Use Financial Statements to Make Future Business Decisions?

Companies use financial statements to review current operations and make adequate business decisions, a key ingredient for long-term profitability. Adapting strategic decisions to the corporate financial standing ensures that operations managers have sufficient money to fund long-term initiatives. Accounting reports include a balance sheet, an income statement, an equity report and a cash-flow statement.

Balance Sheet

    A company delves into its balance sheet to ensure that corporate assets and debts are compatible with top leadership’s strategic vision. This is perhaps more important for an organization that has grown very fast, as it must cope with changing economic realities to keep on expanding. Similar to a big train moving down rickety ancient tracks, the business may experience financial turbulence if it’s not nimble enough to adapt to current situations. Also known as a statement of financial position or statement of financial condition, a balance sheet provides valuable data about corporate resources, debts and net worth — or total assets minus debts.

Income Statement

    In the business context, the philosophy of doing well by doing good is hardly unknown to top leadership. Companies engage in charitable activities, a form of social activism, to improve their marketplace reputation and woo customers. A focused, well-executed marketing plan enables a business to know what customers want and how to satisfy their needs. By sifting through the corporate income statement, financial managers can zero in on top customers and separate blockbuster products from money-losing items. Also known as a statement of profit and loss, an income report includes revenues and expenses.

Cash-Flow Statement

    In modern economies, soaring food prices eat into the budgets of all market participants, including businesses and individuals. A manufacturer that uses commodities, such as steel and iron, in its production processes must watch item prices closely. Failure to do so could increase the company’s costs of good sold — or “cash paid to suppliers,” as accountants dub it in the “operating activities” section of the cash-flow statement. The other two sections of a liquidity report are “cash flows from investing activities” and “cash flows from financing activities.”

Equity Statement

    A firm reviews its statement of shareholders’ equity to determine whether corporate assets are generating positive returns and to figure out how to compensate stockholders. The business usually does so by making periodic payments and buying stocks back, an exercise that generally increases share values down the road. A statement of equity includes such items as dividends paid and retained earnings as well as stock repurchases and sales.

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