Financial Statements

Back to: Accounting 101

Welcome back! Today, we’re learning how to put all your financial information together in the form of Financial Statements.

Introduction:
Financial statements are reports that summarise the financial performance of a business. They help the owner, investors, and other stakeholders see how the business is doing.

Body:

• The Income Statement:
  This shows the profit or loss of a business over a period of time. It compares revenues and expenses.

• The Balance Sheet:
  This shows the business’s financial position at a specific point in time. It lists assets, liabilities, and equity.

• The Cash Flow Statement:
  This shows how cash moves in and out of the business.

Financial statements are formal records of a company’s financial activities and performance. They provide a snapshot of a business’s financial health and are essential for decision-making by management, investors, creditors, and other stakeholders. The four main types of financial statements are the income statement, balance sheet, cash flow statement, and statement of changes in equity.

1. Income Statement (also known as the Profit and Loss Statement): This statement shows a company’s revenues and expenses over a specific period, typically quarterly or annually. It calculates the net income or loss by subtracting total expenses from total revenues. The income statement provides insights into a company’s profitability.
2. Balance Sheet: The balance sheet presents a company’s financial position at a specific point in time, listing its assets, liabilities, and shareholders’ equity. The fundamental accounting equation—Assets = Liabilities + Equity—must always hold true. The balance sheet helps determine the company’s liquidity and financial stability.
3. Cash Flow Statement: This statement tracks the flow of cash in and out of the business, categorized into operating, investing, and financing activities. It shows how well a company manages its cash to fund operations and meet its obligations. Unlike the income statement, which includes non-cash items like depreciation, the cash flow statement focuses solely on cash transactions.
4. Statement of Changes in Equity: This statement provides a detailed view of the changes in a company’s equity during a given period. It includes new investments, dividends paid, retained earnings, and other changes in equity, helping to explain fluctuations in the ownership interest of shareholders.

Conclusion:
Financial statements help businesses track their financial health and are essential for decision-making.

Evaluation:

• What is the purpose of an income statement?

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