Introducing Financial Statements
Defining the Financial Statement
A financial statement is a formal
report of the financial activities of a business, person, or other
entity. Financial statements are a key component of accounting, the
process of communicating information about a financial entity.
Financial statements are presented and structured with
conventions accepted by accounting and regulatory personnel. An entity's
financial statement typically includes four basic components: a balance
sheet, income statement, cash flow statement, and statement of changes
in equity:
Keeping Money Organized Financial Statements help keep money organized.
- The company's balance sheet reports on its assets, liabilities, and ownership equity. It is often described as a
"snapshot of a company's financial condition" at a single point in
time. Balance sheets usually present assets in one section
and liabilities and net worth in the other.
- An income statement reports a company's expenses and profits to
show whether the company made or lost money. It also displays the
revenues of a specific period and the costs and expenses charged against
these revenues. In contrast with the balance sheet, which represents a
single moment in time, the income statement represents a period of time.
- A cash flow statement shows how changes in income affect cash and cash equivalents, breaking the analysis
down to operating, investing, and financing. Essentially, the cash flow
statement concerns the flow of cash in and out of the business. As an analytical tool, it helps determine a company's short-term viability.
- A statement of changes in equity explains the company's equity throughout the reporting period. The statement breaks down changes in the owners' interest in the organization and the application of retained profit or surplus from one accounting period to the next. Line items typically include profits or losses, dividends paid, redemption of stock, and any other items credited to retained earnings.
For complex entities, financial statements often include an extensive set of notes explaining financial policies. The notes typically describe each item in detail. For example, they may explain financial figures or the accounting methods used to prepare the statement.
Key Points
- Financial statements are formally prepared documents communicating an entity's financial activities to parties including investors, management and tax officials.
- An entity's financial statement typically includes four basic components: a balance sheet, income statement, cash flow statement, and statement of changes in equity.
- The balance sheet reports a point-in-time snapshot of the assets, liabilities and equity of the entity.
- An income statement reports on a company's expenses and profits to show whether the company made or lost money.
- The cash flow statement reports the flow of cash in and out of the business, dividing cash into operating, investing and financing activities.
- A statement of changes in equity explains the changes of the company's equity throughout the reporting period, including profits or losses, dividends paid and issue or redemption of stock.
Terms
- Liabilities – An obligation of an entity arising from past transactions or events, including any type of borrowing
- Equity – The residual claim or interest to investors in assets after all liabilities are paid. If liability exceeds assets, negative equity exists and can be purchased through stock.
- Assets – Economic resources that represent value of ownership that can be converted into cash (although cash itself is also considered an asset)
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