2. Income Statement

The income statement reflects the revenues and expenses incurred from operations over a specific period of time, communicating the resulting profit or loss. Used internally, income statements can provide performance information relative to specific products, product lines, processes, or divisions within the company. Cost structure is essential to profitability, therefore specific cost information is imperative to appropriate operations planning. Restructuring and reassigning costs by their behavioural patterns creates a contribution margin income statement. The contribution margin income statement represents the resources remaining to cover fixed expenses after variable expenses are accounted for. The benefit of reclassification and reorganization of costs to management, as they plan for future periods and work to control costs and increase profitability, is that it provides profitability information as it relates to the different processes and products. This facilitates more informed and intelligent decision-making regarding pricing, price adjustments, product line development and elimination of products or processes that are unprofitable and drain on resources created by more profitable products and processes

At the top of this statement will be wording to the effect of "For the period ended...". Where the balance sheet shows a point-in-time snapshot, the income statement shows the business' activities for a period of time, usually a year.

The first line or grouping of lines on the income statement shows the revenues for the year. They may be called "Revenue" or "Sales" or "Gross Income", depending on the style of statements. The revenue is the gross amount of income earned from the business activities, less the sales taxes. It is important to note that sales will appear here even if the company hasn’t collected the money yet. Financial statements are generally prepared using the accrual method, which places revenue and expenses into the period in which they are earned, not collected.

Revenue minus your expenses is called the "Net Income". This is the amount that the business will keep and add to the equity. At the bottom of the income statement, we may find a reconciliation of the equity. It will start with the income earned in the current year, add the opening equity, and subtract any dividends paid out to the shareholders in the year. The ending equity will be the same equity number found on the balance sheet.

3. Cash-flow Statement

Incoming cash receipts and outgoing cash payments are reported in the statement of cash flows. Fluctuations in cash during the reporting period are evident in the cash flow statement. Inflows and outflows are classified into three specific business activities: operating, investing, and financing activities. Operating activities will generate revenues, associated expenses, and any gains or losses, directly influencing the net income as provided from the income statement. Current assets and liabilities are also directly influenced by operating activities, further impacting the company's balance sheet. Long term assets are increased and decreased through investment activities, and all purchases and sales relative to long term assets, as well as loans to others and collections on loans are reported as investment activities on the cash flow report for the period. Obtaining cash for launching or funding continuing operations for the business are classified as financing activities. Issuance of stock, borrowing money from a bank or other lender, the purchase and sell of treasury stock, and paying dividends to shareholders are all considered financing activities and are reported as such on the statement of cash flows. When analyzing the statement of cash flows, it is generally a good sign for long-term success if the majority of the cash flows associated with business activity are generated through operating activities. If the majority of the cash flow is generated through financing activities, that should represent only a short-term situation, as financing should not persist and investors will begin to demand a return. If the organization's reported investing activities make up the majority of cash flows for any given period, that is typically interpreted as a bad sign, as it could signal business troubles through sales of long-term assets. Understanding how to correctly classify and analyze operational inflows and outflows will assist management in spotting problem areas and restructuring to maximize on organizational potential.

There are two main classifications on the cash flow statement; sources of cash and uses of cash. Every transaction the business has entered into in the year has either been a source or use of cash. The main source of cash, of course, is net income. Other common sources are; collection of accounts receivable, loan proceeds, and incurring payables instead of paying cash. Common uses of cash are; paying payables, paying down debt and buying equipment or inventory.

At the end of cash flow statement, current cash balance shows. The statement has reconciled opening cash to closing cash.

Chapter 4. Forecasting Financial Statements.

Managers and external users of financial information are more concerned with what the future holds for an organization than its past history because what has happened has happened and reporting systems are incapable of changing history. Financial forecasts on the other hand can be used for budgeting as well as planning purposes. The forecasts offer expected results based on historic facts. Investors and shareholders around the world base their decisions on financial and economic forecasts. Public companies are special under constant pressure to perform according to budgeted expectations and forecasts. Failure to do so results in lower stock prices and financial difficulties. Forecasting comes under the broad subject of predictive accounting. The four main aspects of predictive accounting are:

• It improves projecting financial performance by monitoring whether processes are in control. In-control processes are predictable; out-of-control processes are unpredictable.

• It seeks to understand the future.

• It is based on the premise that the actions of an organization are repeatable processes.

• It uses processes that describe the way the organization works.

Financial forecasts assist firms in identifying finance (external and internal) requirements as well as asset requirements. In short financial planning is a process by which firms identify their goals and cost and plan how to meet them. One of the main advantages of financial forecasting is that it identifies interactions between various elements of a firm, for example how inventory changes affect finance costs. It also makes clear which financing options are more suitable in the long term and which ones would cause problems. By incorporating external factors such as the rate of inflation and interest rates in to the forecast, the organization is able to avoid surprises.

Financial plans are of various types and vary according organization structure, size and the market in which it operates. A business that is just starting out should ideally make a 2 or 3 year forecast whereas a business which is well established can make a reliable 5 year forecast. A magazine publisher should only forecasts its sales for the following year since it cannot predict changes in the market and consumer trends in the coming years by its current state of sales. A manufacturing company or a company which has long lead times regarding construction of new plants, long lead times for development, approval and testing procedures can rely on a 10 year forecast. The time period should be long enough to ensure that any periodically paid material cost has not been ignored and the time period should be short enough so that variations in the level of activity are not averaged out. Before any extrapolation techniques are used the past data should be examined to determine their appropriateness to their intended purpose.

Chapter 5. Financial statement analysis.

The different financial statements discussed are used together and separately in numerous ways to assist management in planning and controlling future operations as the specific data resulting from analysis provides the information needed to make the operational changes required for improved overall organizational efficacy.

Financial statement information is used by both external and internal users, including investors, creditors, managers, and executives. These users must analyze the information in order to make business decisions, so understanding financial statements is of great importance. Several methods of performing financial statement analysis exist.