a c c o u n t s d e m y s t i f i e d
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Summary
The balance sheet is the definitive statement of a company’s financial
position. It tells you what a company’s assets and liabilities are at a
point in time and hence what the company’s net assets are. It also
tells you how the company came by those net assets.
The P&L is a descriptive statement. It tells you how and why the
retained profit item on the balance sheet changed over the course of
the last year.
The cash flow statement is also a descriptive statement. It tells you
how and why the cash/overdraft as shown on the balance sheet
changed over the course of the last year.
You can draw up descriptive statements for any other item on the
balance sheet. The only reason that the P&L and cash flow statement
are given such prominence in an annual report is because they
describe the most important aspects of a business.
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