A financial statement is a document that shows the financial position or status of an organization.
In the simplest terms, it shows all money coming into and going out of the business.
In accounting terms, this is represented by assets owned and liabilities owed—viewed together, they provide a “snapshot” or summary of the business’s financial state.
Financial statements are usually produced for a specific time period—monthly, quarterly or annually. They include line-by-line details as well as totals for the aspects of the business they address to help management make meaningful conclusions about the business and its financial status.
Finances for a business are complicated, and financial statements are produced that reflect different aspects of the business’s current status. These statements are often considered together to get the full picture of the business.
Because there are many different facets to the operation of a business, there are several different types of financial statements. Each type presents the details for a specific aspect of the business’s finances.
The balance sheet shows what a company owns and what it owes at a specific point in time. In accounting terms, this is expressed as equity, liability, and assets. The terms themselves are arranged in the format of an equation. Specifically, it reads as equity = assets – liability. It is a snapshot of the company’s value or worth for the point in time at which it is produced.
In this equation, assets refer to anything that the business owns which has a monetary value. They include a range of resources, such as land, buildings, equipment and machinery, trademarks, cash, and inventory. Assets are categorized as either current or non-current. Current assets can be liquidated, or converted to cash, in a relatively short period of time, usually one year or less. Non-current assets cannot be converted to cash in less than one year.
Liabilities are anything that the business owes to another person or business. Like assets, there are many different kinds, including loans, taxes, payroll, unpaid invoices, and obligations to customers.
As expressed in the equation, equity is the total value of the company if all its assets were sold or liquidated and all of its liabilities were paid off. This is also referred to as net worth, or in the case of a publicly traded company, shareholders’ equity. The latter term refers to the money that would be left to the shareholders, who are the actual owners of the company.
The income statement focuses on how much revenue the business earned for a particular point in time. This document lists the gross, or total amount of, sales revenue generated by the business for the period, minus the costs associated with those earnings to determine the net earnings or bottom line.
The actual calculation for the bottom is a little more complicated. To arrive at the bottom line, the business must first calculate it gross profit. This is done by subtracting the so-called cost of goods sold (COGS) from the total sales revenue. COGS refers to the actual cost in terms of labor and materials for the business to produce the goods or services that it sells.
From the gross profit, the income statement will then subtract operating costs, such as rent, equipment, marketing, and supplies. It will also subtract other expenses, such as taxes and interest, to arrive at the net profit.
The cash flow statement focuses on the exchange of money between the business and its customers and vendors. It does not look at assets and liabilities or profit and loss. It only examines the ability of the business to generate cash.
Cash flow is an important detail because every business needs cash to operate. Cash is used to pay bills, fulfill payroll, pay vendors, and cover other expenses. A business’s ability to generate cash is a reflection of its overall health and viability.
Cash flow statements will list all manner of financial activities that impact cash, such as accounts receivable, accounts payable, inventory, unearned revenue, and net income. The information in a cash flow statement is typically arranged in three sections:
1. Operating cash flow details all the business’s principal revenue producing activities, including sales, purchases, and other expenses.
2. Investing cash flowrefers to financial transactions involving the selling of assets, such as property, plant, and equipment (PP&E). These are also referred to as capital expenditures. Investing cash flow also details transactions pertaining to other non-current assets, such as lending money or selling investments in a stock portfolio.
3. Financing activities include all transactions related to the financing of the business, such as receiving or paying off bank loans, issuing stocks or bonds, and paying dividends.
The statement of shareholders’ equity is a financial statement that shows changes in the interests of the company’s shareholders over time.
It highlights changes in value to stockholders' or shareholders' equity, or ownership interest, in a company.
A statement of shareholders’ equity will itemize such details as preferred stock, common stock, treasury stock, additional paid-up capital, retained earnings, and unrealized gains or losses.
The statement of shareholders’ equity is designed to highlight business activities that contribute to an increase or decrease in value of shareholders' equity.
Financial statements provide necessary details about the financial state of affairs for the business.
This information is valuable to various stakeholders in the business, such as management, investors, lenders, and stockholders.
Balance sheets provide important insight into the business’s assets and net worth. Income statements shed light on operating costs and profit.
Cash flow statements indicate whether or not the business has enough cash to maintain important operations.
Finally, shareholders’ equity statements provide important information that equity investors need to evaluate their position in the business.
While the different financial statements are independent of one another, they are connected. Information from one financial statement is fed into another. For example, the closing balance from the cash flow statement is entered as an asset in the balance sheet.
The net earnings from the income statement are used to help calculate operating cash flow in the cash flow statement.