financial statements

Accounts Receivable

Accounts Receivable Jonathan Poland

Accounts receivable (AR) are the outstanding amounts owed to a business by its customers for goods or services provided on credit. Essentially, accounts receivable represent the money that a company is entitled to receive from its customers, usually within a specified time frame (e.g., 30, 60, or 90 days).

When a company sells goods or services on credit, it creates an invoice for the customer. The invoice specifies the amount due, the terms of the sale, and the due date for payment. The unpaid portion of these invoices becomes the company’s accounts receivable.

Accounts receivable are considered as current assets on a company’s balance sheet, as they are expected to be collected within a short period of time, typically less than one year. Efficient management of accounts receivable is critical to a company’s cash flow, as it ensures that the company can receive the funds it needs to cover expenses, make investments, or pay its own debts.

Examples of Receivables

Receivables, or accounts receivable, can come in various forms depending on the nature of a business and its transactions. Here are some common examples of receivables:

  1. Sales on credit: When a company sells goods or services to a customer on credit terms, it creates an invoice that specifies the amount due, the terms of the sale, and the payment due date. The customer is expected to pay the invoice within the specified period. Until the payment is received, the outstanding amount is considered a receivable.
  2. Loans provided: If a business lends money to another entity, such as a supplier, partner, or employee, the amount lent becomes a receivable until it is repaid. The loan agreement usually outlines the repayment terms, interest rate, and schedule.
  3. Rent receivables: If a company owns rental property and leases it to tenants, the outstanding rent owed by the tenants is considered a receivable. This can include both residential and commercial rental properties.
  4. Interest income: If a company has made an interest-bearing investment, such as a bond or a deposit, the interest income that has been earned but not yet received is considered a receivable.
  5. Insurance claims: When a business files an insurance claim for a covered loss, the claim’s unsettled portion is considered a receivable until the insurance company pays the claim.
  6. Tax refunds: If a company has overpaid its taxes and is expecting a refund from the tax authorities, the anticipated refund amount is considered a receivable.
  7. Legal settlements: If a company is awarded a settlement in a lawsuit or legal dispute, the unpaid portion of the settlement is considered a receivable.

These examples illustrate various types of receivables that can arise from different business activities. The common thread among them is that they represent amounts owed to the company that it expects to collect in the future.

Cash Flow Statement

Cash Flow Statement Jonathan Poland

The cash flow statement is a financial statement that shows the inflows and outflows of cash for a company over a specific period of time. It provides information about a company’s cash receipts and cash payments, and shows the net change in the company’s cash and cash equivalents during the period.

The cash flow statement is typically prepared using the indirect method, which starts with the net income for the period and adjusts for non-cash items and changes in balance sheet accounts to arrive at the net cash flow from operating activities. The statement then shows the cash flows from investing and financing activities, which provide additional information about the sources and uses of the company’s cash.

The cash flow statement is an important financial statement, as it provides information about a company’s ability to generate cash flow from its operations and its investment and financing activities. It is useful for both internal decision-making and external reporting to investors, creditors, and other stakeholders.

Cash flows from operating activities represent the cash generated or used by a company’s core business operations. These cash flows include items such as cash receipts from sales, cash payments for expenses, and cash payments for taxes.

Cash flows from investing activities represent the cash generated or used by a company’s investments in long-term assets, such as property, plant, and equipment, or investments in other companies. These cash flows include items such as cash receipts from the sale of assets, cash payments for the purchase of assets, and cash payments for dividends or interest.

Cash flows from financing activities represent the cash generated or used by a company’s financing activities, such as the issuance or repurchase of debt or equity securities, or the payment of dividends. These cash flows include items such as cash receipts from the issuance of debt or equity, cash payments for the repurchase of debt or equity, and cash payments for dividends.

Together, these elements provide a comprehensive picture of a company’s cash inflows and outflows, and are essential for understanding the company’s ability to generate cash flow and meet its financial obligations.

Balance Sheet

Balance Sheet Jonathan Poland

The balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and equity, and provides information about the company’s financial health and its ability to generate cash flow. The main elements of a balance sheet are assets, liabilities, and equity.

Assets are the resources owned by the company, such as cash, investments, property, and equipment. They represent the value of the things that the company owns and can use to generate income. Assets are important because they provide the company with the means to generate cash flow and meet its financial obligations.

Liabilities are the obligations of the company, such as debt, taxes, and other expenses. They represent the value of the things that the company owes to others, such as creditors or vendors. Liabilities are important because they represent the company’s obligations that must be paid out of its cash flow or assets.

Equity is the residual interest in the assets of the company, and represents the ownership of the company’s shareholders. It is the value of the company that remains after all of its liabilities have been paid off. Equity is important because it represents the value of the company that is owned by its shareholders, and it is the source of the company’s ability to generate cash flow and grow its business.

The balance sheet is structured in a way that reflects the fundamental accounting equation: Assets = Liabilities + Equity. This equation shows that the value of a company’s assets is equal to the sum of its liabilities and equity. The balance sheet is prepared using this equation as a starting point, and shows the values of the company’s assets, liabilities, and equity at a specific point in time.

Other elements of the balance sheet may include items such as retained earnings, common stock, and paid-in capital. These items provide additional information about the company’s financial position and are typically presented as separate line items on the balance sheet.

Income Statement

Income Statement Jonathan Poland

An income statement is a financial statement that shows a company’s revenues, expenses, and profits over a specific period of time. It is also sometimes called a profit and loss statement or statement of operations. The income statement provides information about a company’s financial performance, including the costs of running the business, the income earned from its operations, and the net profit or loss for the period. This information is useful for both internal decision-making and external reporting to investors, creditors, and other stakeholders.

The main parts of an income statement are revenues, expenses, and net income. Revenues, also known as “sales” or “top line,” represent the money earned by the company through the sale of goods or services. Expenses, also known as “costs” or “bottom line,” represent the costs associated with generating those revenues, such as the cost of goods sold, operating expenses, and taxes. Net income, also known as “profit” or “net profit,” is the difference between revenues and expenses, and represents the amount of money the company has made or lost over the period.

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