How to Assess the Financial Health of a Company - Part II Articles | Accounting

Dividends, revenues and expenses are three types of transactions which influence retained earnings. Revenues and expenses are directly linked to the stocks going up or down respectively. Irrespective of the nature of business revenues and expenses occur while running the business. For instance, when you own websites and run an online business, your operating expenses would be web hosting or domain name. Another example is when a customer decides to pay you for a service which you are going to provide in the future. This amount is put under the account receivables or the asset account. This increases the asset value but reduces the stocks holder’s equity. However when the company promises to provide a service in the future it is regarded as an expense. In such a case, the accounts receivable or the asset value goes down and the liabilities or the accounts payable increases.

When the revenues are more than your expenses the resultant difference is your net income. But when the expenses are more than your revenues, it is called net loss. This figure shows that your business is not incurring any profit. On the contrary, it costs more to fun your business than your earnings are. Dividends are distribution of assets amongst the stock holders with relation to past earnings. Dividends and expenses should not be mixed up as they are separate entities, though both result in a reduction in the amount of retained earnings. Therefore retained earnings signify the net income less the expenses. The financial statement of a company gives vital information about the financial health of a company to people who have some sort of interest in the running of the company. This can also be viewed as a business model which reveals the financial health of a company.

Though the financial statement is not without its share of flaws and drawbacks, there are four main financial statements, which are: income statement, the retained earnings statement, the balance sheet, plus finally the cash flow statement. The income statement summarizes the revenues and the expenses incurred. Most accountants believe this to be the most important statement as it details the financial health of a company and tells you whether the company has been able to meet its business goals in terms of profitability. The retained earning statement displays the details of retain earnings over a fixed time period. When the statement shows zero retained earnings, it pertains to the time when the company started its business at the beginning of the accounting period.

Many companies use the retained earning statement in lieu of the stockholder’s equity statement. This is a far detailed statement as it not only shows the retained earnings but also brings forth any change or alterations which could have taken place during the accounting period in the accounts of stockholder’s equity. The balance sheet is a statement which is prepared every month or year end and shows the financial situation of the company. It shows the value of the business in terms of its assets as well as the claims or liabilities which those assets attract in the stock holder’s equity. The company’s liquidity status is displayed by the cash flow statement. The amount which is obtained after deducting the cash outflow from the cash inflow is the net cash flow. The cash flow statement shows the money the business has made as well as the investments or any other financial transactions which were made during the particular accounting period.