Financial Statements as a Business Presentation Tool

We, Financial Group, explained here on previous month about revenues for retained earnings, now we go into extra details about expenses and dividends for retained earnings. Furthermore, we will discuss how financial statements can be used as a kind of business presentation tool for every successful company.

What are Expenses and Dividends For Retained Earnings

Once a company agrees to offer a service or product in the future, then by definition it is called an expense. With such an expense, company assets (accounts receivable) will decrease, while company liabilities (accounts payable) will increase. By basic accounting definitions, when company revenues exceed its expenses, then it is called net income (financially good, right?), but when company expenses exceed its revenues, then it is called net loss. Net loss is financially bad for any company because it means that your business is costing you money more than what you can earn or you are just simply losing business.

By definition, dividends refer to distribution of company assets to shareholders based on its past earnings. Please do not confuse dividends with expenses, they are financially different, although they both will reduce the amount of retained earnings. According to accounting principles, retained earnings are defined as the company collected net revenues (or incomes) minus company expenses.

Financial Statements as a Kind of Business Presentation Tool

In modern world, financial statements of a business are already extensively used for communicating its financial information to investors who have certain kind of interests in the business. You can also consider these financial statements as a kind of business presentation tool since they can effectively show to all concerned investors how its business is performing under specific financial or accounting terms. Just like other kinds of business presentation tools or methods, however, financial statements are never perfect for investors and do have their flaws that can sometimes be misleading.

For every financial statement, there must have four key elements. They are namely:

(i) Income statement;
(ii) Statement for retained earnings;
(iii) balance sheet;
(iv) Statement for cash flows.

By definition, income statement is used to summarize the money made by a company or revenues earned, as well as the money necessary for a business operation or expenses needed. Most accountants consider income statement as the most vital section in any financial report since income statement can make it clear if a business does achieve its stated profitability goal or not.

The second key element in financial statements is statement for retained earnings, which shows retained earnings of a company for a certain period of time. By basic definition, the time which retained earnings should be zero is when a business firstly starts up in its accounting period. Some companies may substitute retained earnings with statement for stockholder equity, which shall be a more detailed financial statement. It is because statement for stockholder equity can show not only the original aspects for retained earnings but this statement can also disclose accounting changes in the shareholders equity accounts.

The third key element in financial statements is the well-known balance sheet. By basic definition, balance sheets refer to financial conditions of a company for a particular period, usually finalized at the end of year or month. Balance sheets can at least show the financial value of a company based on its assets as well as claims against these assets, which are shareholders equity and liabilities of the business.

The last key element in financial statements is statement for cash flows, which is geared normally towards liquidity measures of a business. Those liquidity measures basically refer to cash inflow or cash outflow of a business. By fundamental accounting definition, net cash flow is just a mathematical subtraction between cash inflow and cash outflow. What is more, statement for cash flows can show the money earned from business operation, and it can also show the financing or investing transactions that made during a specific accounting period.

That is how financial statements can be used as a kind of business presentation tool for every successful company. Hope the above information can be useful for you, no matter you just recently start up your own business or you have already run a business for a long period of time.