Accountants use financial statements to provide an accurate picture of the financial position of a business, organization or individual explains Aron Govil.
There are three major types of financial statements:
These financial statements are different in the information they provide, but they are all prepared according to established accounting principles.
The following are brief explanations of each type of financial statement.
1) The income statement is also known as a profit and loss statement or simply a P&L. It provides an overview of how much money an organization has made or lost during a certain time frame. This statement calculates net income or net loss by subtracting costs from revenue to give investors, creditors and other stakeholder’s insight into business performance.
The income statement typically covers a specific amount of time, such as one quarter (three calendar months) or year (12 calendar months). These statements are sometimes calledples of 12 because they report for a year.
2) A balance sheet provides a snapshot of an organization’s financial condition at a certain point in time. It details what an entity owns, owes and is owed. The difference between the two sides of this statement represents net worth, which is also known as equity or the book value of assets. This figure tells stakeholders whether their investment in the company is increasing or decreasing over time. This type of financial statement reports on conditions at a specific moment in time, often one quarter or one year after the reporting period covered by the income statement.
3) The cash flow statement shows changes in cash position from different operating activities during a particular time frame explains Aron Govil. Cash flow statements report for one quarter or one year periods. That are not necessarily connected to income statements. This statement is sometimes called a statement of changes in financial position, because it shows the effects on an entity’s cash position from transactions and other events that have occurred during a time period. Like the income statement, the cash flow statement provides insight into business performance.
The following example describes how a company’s three main financial statements work together. Let’s say Acme Incorporated reports its fiscal year results for 2014 as follows:
Income Statement for Fiscal Year 2014
- Revenue $1,000,000
- Cost of goods sold expense from revenue (600,000)
- Gross margin 400,000
- Operating expenses (500,000)
- Net income before taxes 100,000
- Taxes (30,000)
- Net income $ 70,000
- Balance Sheet at Fiscal Year End 2014
- Assets: Cash and cash equivalents $30,000
- Accounts receivable 100,000
- Inventory 300,000
- Property plant and equipment 500,000
- Total assets 1,200,000
- Liabilities: Accounts payable 200,000
- Income tax payable 30,000
- Stockholder’s Equity: Class A common stock 50,000
- Class B common stock 40,000
- Total equity 90.00% (ownership) 100.00% (percent) 1120.0 0
- Cash Flow Statement for Fiscal Year 2014 (in thousands)
- Net cash provided by (used in) operating activities $ (400,000)
- Cash flows from investing activities (40,000)
- Cash flows from financing activities 220,000
- $ (140,000)
The income statement reports the revenue and net income for the company. The balance sheet shows that Acme had assets of $1,200,000 at the end of 2014. The cash flow statement includes changes in cash during 2014. It indicates that Acme had more than enough money to meet demand says Aron Govil. If it didn’t have the cash on hand to pay its bills or secure new loans, this might indicate a liquidity problem some time during the year. An examination of all three statements tells us that the company performed well during 2014.
The income statement is prepare for a specific period of time usually express in months, quarters, or years.
A financial organization prepares the income statement their needs, whether they are preparing it for tax reports or for public reports to shareholders and owners. The income statement covers the revenue generated during that time frame as well as expenses incurred by the company during that same time frame. There are three common types of statements: single-step, multi-step and classified multi-step (or “IRS”).
The income statement is prepared by a company’s top officers and its accountants. The income statement shows the revenues of the company, the expenses it incurred, and its net profit or loss for that specific time frame.