Which financial statement is the most important? — AccountingTools (2024)

FAQs

Which financial statement is the most important? — AccountingTools? ›

The income statement will be the most important if you want to evaluate a business's performance or ascertain your tax liability. The income statement (Profit and loss account) measures and reports how much profit a business has generated over time. It is, therefore, an essential financial statement for many users.

However, many small business owners say the income statement is the most important as it shows the company's ability to be profitable – or how the business is performing overall. You use your balance sheet to find out your company's net worth, which can help you make key strategic decisions.

But if the decision you need to make has to do with, for example, the amount of debt obligation your business can safely take on, you will find the cash flow statement more helpful. The cash flow statement and income statement are just two critical tools in managing your business.

1. Balance Sheet. The Balance Sheet is a financial statement summarizing a company's total assets (current, non-current and intangible assets), liabilities (financial obligations), and shareholders' equity (investments and retained earnings) at a specific point in time, usually at the end of an accounting period.

The Income Statement

Starting with direct, the top line reports the level of revenue a company earned over a specific time frame. It then shows the expenses directly related to earning that revenue.

Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.

The income statement will be the most important if you want to evaluate a business's performance or ascertain your tax liability.

Perhaps one of the most important of those documents, an income statement shows all of a company's revenues and expenses and is a key indicator of how they'll perform in the future.

Cash flow statements, on the other hand, provide a more straightforward report of the cash available. In other words, a company can appear profitable “on paper” but not have enough actual cash to replenish its inventory or pay its immediate operating expenses such as lease and utilities.

Also known as the statement of cash flows, the CFS helps its creditors determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts. The CFS is equally important to investors because it tells them whether a company is on solid financial ground.

Which financial statement is most important to CEO? ›

The cash flow statement accounts for the money flowing into and out of a business over a specified period of time. The cash flow statement is arguably the most important of these financial reports because it reveals a business's actual ability to operate.

There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time.

The two most important aspects of profitability are income and expenses. By subtracting expenses from income, you can measure your business's profitability.

Another way of looking at the question is which two statements provide the most information? In that case, the best selection is the income statement and balance sheet, since the statement of cash flows can be constructed from these two documents.

While the cash flow statement is considered the least important of the three financial statements, investors find the cash flow statement to be the most transparent.

The income statement shows a company's expense, income, gains, and losses, which can be put into a mathematical equation to arrive at the net profit or loss for that time period. This information helps you make timely decisions to make sure that your business is on a good financial footing.

Importance of a Balance Sheet

This financial statement lists everything a company owns and all of its debt. A company will be able to quickly assess whether it has borrowed too much money, whether the assets it owns are not liquid enough, or whether it has enough cash on hand to meet current demands.

Changes in current assets and current liabilities on the balance sheet are related to revenues and expenses on the income statement but need to be adjusted on the cash flow statement to reflect the actual amount of cash received or spent by the business.

The bottom line

These two financial statements can do much more for a business. As a team, income statements and balance sheets work together to show just how well the company is performing, how much it is worth, and where there are opportunities to improve.