Introduction
My father runs a food company in Taiwan since 2005. He frequently faces some tough choices and some of it was living or dead, thus he needs financial statements to support his decisions. Although those decisions not always end up with good results, but still reduce the chance to fall like gambling. The statement of cash flows reflects his company's daily operations and shows how the cash flows in and out. The balance sheet shows how healthy his company is in finance, how much resources he can use in the future and how many liabilities he has. The income statement shows the efficiency of his company in making profits and he can know which part is the most important one, the largest part of the total revenues. Despite, he owns the company with no shareholders, no report on the owner's equity, pay attention to the information of it is a preparation for the future.
Statement of Cash Flows
This report shows the operating of his company and reveals how cash is generated and expended during a specific period of time, a month or a year. The cash inflows and outflows may attributable to operating activities, investing activities, and financing activities. For instance, his factory needs to purchase pork as an ingredient in making several products, this activity cause outflows of cash. He can understand how much pork he has purchased in operating by reviewing the report. How does this helpful? Well, if he trying to make a decision such as limit his cost on production or budgeting his cost on production, although it is a record of the history. Another crucial part of the statement of cash flows is that it provides a standard, accurate and impartial of these operating activities.
The Income Statement
As we have learned about the income statement, every business owners desire to know how much revenues they earn from their customers, either does my father. The income statement shows how much inflows from customers, the cost of production and the net income, my dad can make his decision accordingly, such as how attractive his products are. For instance, if he increases the prices of his products, opening a sale project, or putting on an advertisement, he wants to know how much of these costs affect his revenues. Suppose my father wants to gain more capital to expand his business, this is the information that outside investors would like to see.
The Balance Sheet
Just like every time we decided to go outdoor with umbrella or not. Did you make the decisions without watching the weather forecast? Or you just bet you are lucky and everything is under your control? That's why we need financial statements to support our decisions. On the balance sheet, we shall know how much resources we have, how much liabilities, and what's the equity. It is crucial to know how much abilities you have if you are making a life-or-death decision. Overestimate yourself can end up with the cost of your lifetime earning. Business owners can use the retained earnings to purchase more equipment or just keep it for the expected upcoming winter.
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