What Are Financial Statements?
Financial risk is the possibility that the value of your asset or portfolio will fall to an adverse level. It is related to the potential loss of cash that could result from any of a number of events. Financial risk is the dominant ingredient in most of the financial statements we read today.
If there is no increase in equity or liquidity (the sum of all assets) to support the Company’s operations, the effect on cash flows is purely financial. Financial risk is therefore the difference between what the shareholders will pay if the Company goes bankrupt and what they would pay if it were to experience a positive cash flow growth. It is therefore a key concept in determining the valuation of publicly traded securities like stocks, bonds, mutual funds, and property. All publicly traded financial statements are necessarily involved in some form of financial risk.
Short term financial activities are those involving day-to-day cash inflows and outflows. Examples of short term financing include the purchase of inventory, goods, services, accounts receivable, payroll, advertising and promotional expenses, inventory turnover, and other financial activities associated with normal business operations. Long-term financing is the buying of longer-term debt obligations such as commercial mortgage loans, bank financing, and real estate notes. The difference between long-term financing and short-term financing is that long-term financing deals with the probability of a borrower defaulting on a loan while short-term financing involves the probability of a company being able to raise enough cash to satisfy its existing debt obligations.
The financial reporting process includes four major sections: Financial statement, notes and drafts, income statement, and cash flows. The balance sheet, also known as a statement of balance, is a summary of all material financial transactions and liens with a description of the financial transaction. A company’s cash flows are those activities resulting in cash payments, including purchases, sales, and withdrawals. Included in the financial statement is a detailed account of cash flows. The income statement tells how income earned and spent by the company meets its obligations. In the case of corporations, the statement also includes information concerning owners, shareholders, and associations with which the company is affiliated.
The differences between the financial statements and the income statements are the source of financing activities. Cash inflows occur when a company takes on a loan or advances, whereas payables are those debts owed to third parties. Interest paid on advances and loans creates cash inflows and lowers cash balances. A company’s debts, on the other hand, are obligations that are fully payable and are a reflection of the total financial responsibilities of the company.
Investors use both the income statement and balance sheet to evaluate a company’s financial health. If a company is healthy, then the assets and liabilities will be balanced and there should be positive cash flows. On the other hand, a company must have negative cash flows to show that it is going through a period of financial deterioration. A company must also have enough long-term assets and liabilities to support its operations and meet its obligations. The company’s long-term assets and liabilities balance sheet provide a company with a range of information that investors can base their decisions on. These financial statements allow businesses to obtain financing and obtain a profit earlier than with a conventional method.