June 16, 2022
You must have heard other people talking about Financial Statements, so what are those and which types of Finanial Statements are the most populartypes? How can a financial statement be prepared? Why is it so important?.
So let’s start with the basics - what is a Financial Statement?
Financial Statements are the formalized records of a business’s financial activities, position, and performance. Inside a financial statement, nformation is presented in an easy-to-understand, standardized format.
Financial Statements are a key tool for running a business. They are a snapshot of a company’s Finances and give crucial information about business performance. They are the foundation for planning the future course of the business.
Financial Statements can be used by banks and other lenders to evaluate a company’s financial health and available capital when assessing its eligibility for a loan.
Financial Statements are a set of financial documents that show a company’s financial status at a specific point in time. They include key data on what the company owns and owes and how much money it has made and spent.
There are five main financial statements:
An Income Statement is a key Financial Report, that shows a company’s Sales (or Revenue) and Expenses for the period. It shows the company’s ability to both generate profit and manage its Expenses. It is also known as the “Profit and Loss (P&L) Statement”, “Statement of Operations”, or “Statement of Earnings”.
The basic equation of the Income Statement is:
Income - Expenses = Net Income.
Income Statement (P&L) example:
A Balance Sheet is a financial document that presents the financial status of a business through an accounting of a company’s Assets, Liabilities, and Equity. A Balance Sheet, when looked at with a business’ other financial statements, can help investors understand a company’s current fundamentals.
The following formula summarizes what a balance sheet shows:
Assets = Liabilities + Shareholders’ Equity
Balance Sheet Example:
Learn more about Balance Sheet vs Income Statement here.
A Cash Flow Statement is a financial report that gives the movement of cash during a particular period. It provides an idea about the inflow and outflow of Cash from Operating, Investing, and Financing activities. The Cash Flow Statement is prepared using two methods: The Indirect Method and the Direct Method. Generally, the Indirect Cash Flow method is used because it allows for reconciliation between two other financial statements: The Income Statement and the Balance Sheet.
The formula for the Indirect Cash Flow Method is:
Operating CashFlow (Net income + Non-Cash Expenses - Non-Cash Incomes - Change in Working Capital) + Investing Activities + Financial Activities= Net Cash Flow Increase for the period.
Cash Flow report example:
The Statement of Shareholders' Equity is a financial statement that a company issues as a part of the Balance Sheet. It has the changes in value to Stockholders' or Shareholders' Equity, or Ownership Interest in a company, from the beginning of the accounting period to the end of accounting period. The Statement of Shareholders' Equity has the components like Preferred stock, Common Stock, Treasury Stock, Additional Paid-Up Capital, Retained Earnings and Unrealized Gains and Losses.
Notes to Financial Statements:
Notes to the Financial Statements are an integral part of a company's Financial Statements. It provides information about accounting policies, the use of accounting principles, accounting changes, non-monetary transactions, fair value, business combinations, revenue recognition, commitments and contingencies of a legal and financial nature, risks, and uncertainties.
Here is an example of how Walmart’s Notes to Financial Statements look like.
It is important for business owners to understand these four types of Financial Statements and the information they provide to the investor or creditor, who is interested in providing funds for a business.
The following are the four types of Financial Statements:-
If we narrow it down, there are three most important Financial Statements: (1) the Income Statement, (2) the Balance Sheet, and (3) the Cash Flow Statement. These three core statements are interlinked to each other. These statements are designed to be taken as a whole, to present a complete picture of the financial condition and results of a business.
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