Charlotte SCORE appreciates the generosity of Hugh C. Alexander, President, Charlotte Bookkeeping Service, in providing these definitions; a brief description of the minimal financial statement.

Statement of Cash Flow

The Cash Flow Statement provides information about cash receipts and cash payments for a period of time. It helps users to evaluate a business' ability to liquidate its assets and liabilities, to pay its debts as they mature, and to respond and adapt to financial adversity and opportunities.

Operating Activities - cash effects of transactions that determine net income (cash receipts from goods or services sold, payments for inventory, payment of employees, other operating expenses).

Investing Activities - involve long-term assets (making and collecting loans, acquiring and disposing of investments).

Financial Activities - involve liabilities and owner's equity (obtaining cash/loans from creditors and the repayment of those loans, obtaining capital from owners and providing a return on their investment).

Why is the Cash Flow Statement important?

Identifies:

  • The ability to generate positive cash flow.
  • Financial obligations and the ability to meet those obligations.
  • The difference between net income and actual cash balances.
  • The possible need to borrow money and the amount to be borrowed.
  • Cash flows to budgets or projections.

Statement of Income

Income Statement measures the success of a business' operations for a given period of time (How much money was made).

Why is the Statement of Income important?

How the Statement of Income is used:

  • To evaluate the past performance of the business by the owners and/or creditors.
  • To determine the risk of not achieving certain cash flows.
  • To determine tax liabilities.
  • To identify [non-]profitable services and items.
  • To identify excessive expenditures.

Balance Sheet

The Balance Sheet provides information about the nature and amounts of investing in resources, obligations to creditors, and owner's equity in net resources at a given point in time (Overall health and makeup of the business).

Why is the Balance Sheet Important?

How the Balance Sheet is used:

  • Evaluates the capital structure of the business.
  • Computes the rate of return on capital investment of the business to facilitate chronological / interbusiness comparisons.
  • To assess the business’ liquidity and financial flexibility.

Liquidity - the amount of time required to convert an asset into cash or ato pay a liability.

Financial Flexibility - ability of a business to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. Generally, the greater the financial flexibility, the lower the risk of business failure.

Financial Statements