Corporations regularly produce three documents to give a snapshot of a company’s health so investors and creditors can do their due diligence. These documents are balance sheets, profit and loss statements, and cash-flow statements. This guide will compare two of these documents, show how they are used and how they help creditors and investors diagnose the health of a company.
How Are Balance Sheets and Profit and Loss Statements Used?
Balance sheets and profit and loss statements are two of the regular financial reports a company must produce. A balance sheet is a snapshot of a specific point in time highlighting a company’s assets, liabilities, and shareholder’s equity. A profit and loss statement also takes a picture of a company at a specific time, concentrating on revenues, costs, and expenses. Both help people invested in the company and creditors who the company owes manage their risk.
How Are Financial Statements Created and Manipulated?
Accountants, bookkeepers, and solopreneurs use tools like QuickBooks Online to record business expenses and revenue. Financial statements are easy to create and examine on a routine basis to monitor trends and make important business decisions.
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How Do Balance Sheets and Profit and Loss Statements Indicate the Health of a Company?
By looking at a balance sheet and a profit loss statement from a company, an investor who has money involved with the company can get an idea of the company’s relative health, at least at that point and time. The balance sheet tells the investor how much a company is making compared to how much they owe — the net worth. And a profit loss statement shows what the company is spending its money on and its sources of revenue — the bottom line.
Together, they give you an idea of how much a company owes, how much it is making and where the majority of its expenses and revenue sources are. In addition, these statements paint a picture of how wisely the company is managing its financial obligation.
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