A financial statement adheres to generally accepted accounting principles and is used to portray financial information about a business. They typically consist of an income statement, balance sheets, statements of retained earnings, and cash flows.
The balance sheet provides an overview of a company’s assets, liabilities, and stockholders’ equity as a snapshot in time. The balance sheet will tell you what time period the information applies to. Assets are listed on the balance sheet in order of liquidity while liabilities are listed in the order in which they will be paid.
The income statement covers a range of time, usually a full year or a quarter. The income statement provides an overview of revenues, expenses, and net income. It may also provide two to three years of additional data to allow for comparison.
The statement of retained earnings explains the changes in a company’s share capital, accumulated reserves, and retained earnings over the reporting period. These items typically include profits or losses from operations, dividends paid, issue or redemption of shares, revaluation reserve, and any other items charged or credited.
The cash flow statement merges the balance sheet and the income statement. The cash flow statement reconciles the income statement with the balance sheet in operating, investing, and financing activities. Operating activities typically include cash flows made from regular business operations. Investing activities include cash flows due to the buying and selling of assets such as real estate or equipment. Financing activities include cash flows from debt and equity.
Financial statements are important to investors, creditors, and analysts to help them gain an understanding of a company’s business performance. Investors and creditors rely on a company’s financial conditions for making investments or loans. A financial statement will allow them to know where their money went and where it is now. While a balance sheet is just a snapshot in time, the income statement will give important info regarding sales and expenses, giving a picture of the company’s performance and future expectations. While the income statement is valuable, it does contain non-cash elements, meaning you must also use the cash flow sheet to help gain an understanding of whether or not the company has enough cash to pay for expenses and asset purchases.
Reading the statements of retained earnings gives a clear picture of the net worth of a company. The shareholders equity listed in this sheet is a company’s total assets minus its total liabilities. A steady growth in these numbers means this company is a good investment option. Whether you are an investor or a business owner, the numbers in the financial statement can help you understand the true financial performance of the company.