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Financial Reports

Financial reports are essentially the 'report card' of how well your operations did or did not do over a period of time. This section of Money Soup will help enlighten you on what financial reports mean, what information you can gain and how to interpret them.

What Are Financial Reports

Financial Reports -- Summaries of Grouped Transaction Activity

Financial reports, such as the balance sheet and the income and expense statement are summary reports which are built from detailed trial balance categories. Various accounts are grouped and totaled. An example might be CASH, which might consist of the total of the cash balances in three separate bank accounts.

You might ask, why not read the trial balance? If your chart of accounts has 345 different classifications, you would have a difficult time getting an overall picture of your company's financial status or operating activity. Also financial reports often provide comparative information such as how the company performed in the same month last year, or how this yearís operations compare to budgeted expectations.

Key Financial Questions

How Do We Read and Interpret Financial Reports?

Do we know how to read a financial report?

If our financial report compares the data of a current period with a column of data about a previous period, or a budget column, we can see the answer to the question, What's the Difference?

Then we ask the question, Why the Difference?

Answers to Why the Difference questions are the keys to really learning what is going on behind the money activity in an organization.

Good accounting reports should identify differences as much as they tell us about current results. Then we can systematically analyze financial results.

Essential Financial Reports

On at least a monthly basis a business manager should obtain and review the following reports:

Balance Sheet, Operations Report, and Cash Activities Report.

Detailed Revenue Report comparing this year's revenue against the same month last year, and the budgeted revenue for this month this year.

Detailed Expense Report comparing this year's expenses against the same month last year, and the budgeted expenses for this month this year.
Aged List of Customers Accounts Receivable.
Aged List of Vendor Accounts Payable.

Did You Have a Profit or Loss?

Profit and Loss Statement -- What Happened with Operations?

The profit and loss statement tells you, in summary form, how your operations did over a period of time. Revenue and expense activities are shown separately, ending with net profit or loss (the "bottom line"). Typically profit and loss statements report activity for a period not greater than 12 months.

There is an example of the Sample Construction Company income statement in the next screen.

Sample Construction Co. P & L
Sample Construction Company - Income Statement
January through November 2017
Revenue
Construction Labor$ 25,713.75
Construction Materials 26,447.41
Miscellaneous Revenue 2,476.25
Billings of Subcontractors    39,114.25
Total Revenue  93,751.66
Cost of Sales
Cost of Materials 4,095.38
Job Expenses    55,317.10
Total Cost of Sales  59,412.48
Gross Profit  34,339.18
Indirect Expenses
Automobile 184.08
Freight & Delivery 35.00
Insurance 1,350.00
Interest Expense 534.15
Payroll Expenses 15,154.07
Rent 1,200.00
Small Tools 325.00
Utilities      316.96
Total Indirect Expenses 19,099.26
Operating Income 15,239.92
Other Income 105.92
Net Income$ 15,345.84



Financial Status

Balance Sheet - What's Left?

The balance sheet shows how much cash is in the bank, how much customers still owe you, the cost of your equipment and property, your remaining inventory, how much you still owe creditors, and other unpaid liabilities. The balance sheet is thus a status report of what is owned, and what is owed, with net worth or a net deficit making the difference.

Whatís Your Financial Status

Balance Sheets Tell You What You Own, What You Own, and What You Have Left.

Accounting systems, if you have entered all your money transactions, can tell you how much you own and owe at any point in time. The difference between what you own and what you owe is your net worth. This report is called a Balance Sheet.

Your accounting data base can also tell you how you did financially over a period of time. Did you have a profit or loss? This statement is called an Income and Expense Statement.

Using the previous Widget example, your balance sheet would show the following:

BALANCE SHEET


ASSETS

     Cash $3,500

LIABILITIES AND NET WORTH

     Net Profit Year to Date $3,500

INCOME AND EXPENSE STATEMENT


     Sales of Widgets $10,000

     Expenses of Widgets Sold 6,500

     Net Profit Year to Date $3,500

We have made these illustrations are extremely simple to present basic accounting concepts in an understandable form. In your real business there would be many more classifications of Balance Sheet (What's Left) and Income and Expense Statement (What Happened) accounts. However, no matter how complex your business or accounting system the concepts of What Happened and What's Left accounts are no different than the above example.

Sample Company Balance Sheet
Sample Construction Company - Balance Sheet
As of November 30, 2017
ASSETS
Current Assets
Cash $ 63,806.82
Accounts Receivable 60,135.79
Inventory      3,314.62
Total Current Assets  127,257.23
Truck, at cost 33,750.00
Depreciation to Date (3,000.00)
Net Book Value Truck     30,750.00
TOTAL ASSETS $158,007.23
LIABILITIES & EQUITY
Current Liabilities
Accounts Payable 55,690.00
Payroll Liabilities 5,553.37
Sales Tax Payable      1,469.30
Total Current Liabilities   62,712.67
Long Term Liabilities
Note Payable 18,440.83
Truck Loan 16,750.00
Total Long Term Liabilities   35,190.83
Total Liabilities   97,903.50
Owner's Equity
Owner's Contribution 9,000.00
Retained Earnings 35,727.89
Net Income      15,375.84
Total Equity      60,103.73
TOTAL LIABILITIES & EQUITY$158,007.23



What Happened to the Cash?

The cash activity statement, which differs from a statement of operations, shows in summary form how moneys were received and spent over a selected fiscal period. This is a systematic analysis of your checkbooks.

For example, cash deposits include cash sales, payments of customer receivables, but also money borrowed, loans repaid and other transactions that are not shown in the Profit and Loss Statement.

Why Budgets

A powerful way to track your financial progress is to use a budget to see whether things are going well as you planned.

You can report Actual Results versus Budgeted Expectations in a Statement of Operations by showing budgeted amounts in one column and actual results in a separate column. In a third column you calculate the difference. Budget versus Actual Analysis is one of the most powerful tools available to managers.