Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business

CHAPTER 6 FINANCIAL STATEMENTS AND THEIR ANALYSIS

Every business needs to organize its financial data for many purposes, whether these purposes are internal or external. The internal purposes are to assess the business's performance and status. They include

• – the need for owners and shareholders for information on the status of their investment and profitability;

• – the need for management to monitor business performance according to the plans and managerial strategies.

    On the other hand, the external purposes would include the need to

• – disclose key financial information for creditors, who would want to be assured of the business ability to pay interests and pay off debt;
• – know the fate of the allocated funds for the potential investors, who want to make sure what kind of business they get their money into; and
• – Examine the firm's commitments for the Internal Revenue Service, which is most concerned about collecting its taxes, and for the regulators such as the federal and state authorities who want to see full compliance with their rules and regulations.

In this chapter we will go over the key financial statements that are supposed to present business financial data in a commonly acceptable way according to the Financial Accounting Standards Board (FASB) that sets the formats and rules in this regard.

Financial statements are compilations of data designed to provide summarized information and quick indicators of the business financial performance. The most commonly used ...