Commercial Real Estate Encyclopedia

Accounting and Finance >> Financial Statements Overview

Financial Accounting Statements

What are Financial Statements

Financial statements are the documents produced from an accounting system that present a business' or entity's financial position and financial performance. Financial statements are used to understand a company's financial situation. Financial statements can indicate a company's profitability, liquidity, the level of debt and the value of its assets at a certain point in time, or over a given period of time.

The commercial real estate industry makes extensive use of financial statements, so it is important to be familiar with them. Financial statements are important in obtaining financing, analyzing investment property performance, determining the credit worthiness of tenants, and evaluating the feasibility of development projects.

The classic financial statements that are most relevant to commercial real estate are the balance sheet, the income statement, and the cash flow statement. It's important to note the proforma cash flow statement used in investment property analysis follows conventions specific to commercial real estate investment and incorporates market variables.

What is a Balance Sheet

The balance sheet shows the financial position of a firm at a point in time. It's based on the equation: Assets = Liabilities + Equity. It is organized accordingly into three sections.

  • Assets are the resources of the firm.
  • Liabilities represent claims by creditors or other obligations.
  • Owner's Equity represents the residual interest of owners once liabilities are subtracted from assets.

What is an Income Statement

The Income Statement shows the financial performance of a firm over a period of time. In more simple terms, it tells if a business is profitable, or not. The income statement starts with Revenue. Revenue is the inflow of cash or resources that result from operations. This is followed by Expenses which are the outflows or consumption of resources used through producing Revenue. Finally, the income statement concludes with Net Income which is the Revenue less Expenses. If Net Income is positive, then a profit has been made.

Revenue - Expenses = Net Income


What is the Statement of Cash Flows

The statement of cash flows shows the net effect of cash inflows and outflows of a business over a period of time. It's important to know if a business generates enough cash to meet it's current and future needs. The statement of cash flows helps determine a business' need for financing and its ability to meet its obligations.



        

Financial Statements Overview

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