The Balance Sheet is a statement that shows a company’s financial position at a particular point in time. It includes the company’s assets, liabilities, and shareholders’ equity. The preparation of the Balance Sheet involves the following steps:
- Prepare a list of all the company’s assets, including current assets such as cash, accounts receivable, inventory, and non-current assets such as property, plant, and equipment.
- Prepare a list of all the company’s liabilities, including current liabilities such as accounts payable, short-term loans, and non-current liabilities such as long-term debt.
- Calculate the company’s shareholders’ equity, which includes common stock, retained earnings, and other equity.
- Sum up all the assets, liabilities, and shareholders’ equity and prepare a statement showing the company’s financial position at a particular point in time.
Cash Flow Statement:
The Cash Flow Statement is a statement that shows the inflows and outflows of cash and cash equivalents over a specific period of time. It is divided into three sections – operating activities, investing activities, and financing activities. The preparation of the Cash Flow Statement involves the following steps:
- Identify the company’s sources of cash inflows, such as cash sales, collections from customers, and interest and dividend income.
- Identify the company’s uses of cash, such as payments to suppliers, salaries and wages, taxes, and interest and principal payments on debt.
- Categorize the cash inflows and outflows into the three sections – operating, investing, and financing activities.
- Prepare a statement that shows the net cash inflow or outflow for each section and the overall change in cash and cash equivalents over the period.
Using appropriate software, the preparation of the Balance Sheet and Cash Flow Statement involves the use of accounting software such as QuickBooks, Xero, or SAP. These software programs allow companies to input financial information, which the software uses to generate the financial statements automatically. The software can also provide additional features such as data analysis, forecasting, and report customization.