Accounting / August 3, 2018 / Pearl Bailey
Reconciling accounts and comparing transactions also helps your accountants produce reliable, accurate, and high-quality financial statements. Since your company balance sheet reflects all money spent—whether cash, credit, or loans—and all assets purchased with those funds, the accuracy of the balance sheet strongly depends on the accurate reconciliation of your company's financial accounts.
The income statement is one of three financial statements that stock investors need to become familiar with (the other two are balance sheet and cash flow statement). Understanding an income statement is essential for investors in order to analyze the profitability and future growth of a company, which should play a huge role in deciding whether or not to invest in it.
Depreciation expense reduces profit but does not impact cash flow. Hence, it is added back. Similarly, if the starting point profit is above interest and tax in the income statement, then interest and tax cash flows will need to be deducted if they are to be treated as operating cash flows.
You, as the owner of your business, have the task of determining the right amount to invest in each of your asset accounts. You do that by comparing your firm to other companies in your industry and see how much they have invested in asset accounts. You also keep track of how much you have invested in your asset accounts from year to year and see what works.
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