Financial Statements

Financial statements are written records that outline a company's operations as well as its financial success. To ensure accuracy and for tax, financing, or investing purposes, financial statements are frequently audited by government agencies, accountants, businesses, etc. The four fundamental financial statements for for-profit businesses are the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Non-profit organizations employ a comparable but different set of financial statements.

Overview Of The Three Financial Statements

1. Income Statement:

Often, investors or analysts prioritize reviewing the income statement. Displayed at the uppermost part of the statement, sales revenue reflects the company's performance throughout specific periods. The cost of goods sold (COGS) is then subtracted from the statement to get gross profit.

In order to get at net income and the bottom line, gross profit is then affected by various operating costs and income, depending on the type of firm.

Key Features:

  • Displays a business's income and costs.
  • Throughout a long length of time (i.e., 1 year, 1 quarter, year-to-date, etc.)
  • Uses accruals and matching as accounting concepts to depict numbers (not presented on a cash basis)
  • Utilized to evaluate profitability

2. Balance Sheet:

The balance sheet shows what a company owns (assets), owes (liabilities), and the owner's investment (shareholders' equity). Assets must equal liabilities + equity for the balance sheet's two sides to be equal. The first item in the asset section is cash and equivalents, which should equal the balance found at the conclusion of the cash flow statement.

The balance sheet is then updated from period to period with the ending balance in each major account.

The balance sheet from period to period then displays the ending balance in each major account. The shift of net income from the income statement to the balance sheet is represented by changes in retained profits (adjusted for payment of dividends).

Key Features:

  • Demonstrates a company's financial standing
  • Expressed as a "snapshot" or financial representation of the business at a specific time (i.e., as of December 31, 2017)
  • has three parts: shareholders' equity, assets, and liabilities
  • Assets equal liabilities plus stockholder equity.

3. Cash Flow Statement:

The net income is then modified for any non-cash expenses on the cash flow statement. The adjustments to the balance sheet are then used to compute cash inflows and outflows. The beginning and ending cash balances as well as the change in cash per period are shown on the cash flow statement.

Key Features:

  • Demonstrates the changes in cash expressed through time, both positive and negative (i.e., 1 year, 1 quarter, year-to-date, etc.)
  • Violates accrual accounting rules in order to display just cash movement
  • Consists of three parts: cash used for operations, cash used for investments, and cash used for financing.
  • From the beginning to the end of the term, it displays the net change in the cash balance.

Key Takeaways

  • The balance sheet represents a snapshot of the company's assets, liabilities, and shareholders' equity.
  • The major topics of an income statement are a company's revenues and outlays incurred over a given time period. The statement calculates a corporation's profit, or net income, after deducting costs from revenues.
  • The cash flow statement (CFS) measures the efficiency with which a company generates cash to pay debt, operating expenses, and investments.
  • Whether profits are given to outside parties or retained for future growth is tracked in the statement of changes in equity.
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