Guide to Financial Statements: 3 Types of Financial Statements

A financial statement shows a company’s financial performance. Stockholders and analysts rely on financial statements to make predictions about a company’s financial health and the future of its stock price. Basic financial statements are often audited by the government, usually for tax purposes.

The three financial statements are the balance sheet, the income statement, and the cash flow statement.

1. 1. Balance sheet: A balance sheet identifies a business’s present finances, including current assets and debts or liabilities owed. Organizations that deal with a significant amount of money, such as banks, usually prepare financial statements every day, while small businesses might prepare a quarterly statement or annual report. Finances appear in three categories on a balance sheet: assets, liabilities, and equity.
2. 2. Income statement: The income statement, sometimes called a profit and loss statement, illustrates profitability over a specific accounting period. In other words, it shows a company’s revenue, operating expenses, and gross profit.
3. 3. Cash flow statement: A cash flow statement shows how much cash enters and leaves your business over time. Also called a statement of cash flows, the cash flow statement includes cash flow from operations, investing activities, financing activities such as bank loans, and revenue that a company has earned but has not yet received.

The three types of financial statements involve 10 distinct elements:

1. 1. Liabilities: Liabilities are an organization’s debts, or its obligation to deliver value to other organizations. Liabilities listed on a balance sheet can include mortgages, credit card debt, and accrued expenses, such as employee wages. After subtracting current liabilities from assets, the remaining value is called shareholders’ equity, or the book value of a company. Revenue received in advance is also considered a liability because it means the company is obligated to deliver a product or service to a customer later.
2. 2. Assets: A company’s assets are anything deemed valuable to an organization, such as land, facilities, equipment, or certificates of deposit.
3. 3. Equity: A company’s number of assets after subtracting its liabilities is called equity or owners equity.
4. 4. Revenues: Revenue is the top line figure that allows you to calculate the net income (also called the bottom line) by subtracting the costs of running a business. Revenue includes any deductions of customer discounts and returned merchandise.
5. 5. Expenses: The costs of assets consumed during a business’s regular operations are its expenses. Operating expenses or operating activities are the cost of running the business without accounting for the cost of goods sold (COGs).
6. 6. Gains: A company’s gains are its increases in net assets.
7. 7. Losses: A company’s losses are its decreases in net assets.
8. 8. Comprehensive income: All gains, revenues, expenses, and losses during a specific period are considered an organization's comprehensive income. In other words, a company’s income is the change in equity during a reporting period.
9. 9. Distributions to owners: Distributions to owners are the payments of retained earnings to business owners.
10. 10. Investment by owners: Investment by owners is the increase in net assets caused by the business owners transferring assets to the business.

To best understand financial statements, it’s essential to know the difference between an income statement and a balance sheet. There are four key differences:

• Period of time: While an income statement illustrates an organization’s results throughout an accounting period, a balance sheet shows its financial situation at a specific point in time.
• Financial activity: An income statement showcases expenses and revenues, while a balance sheet reports total liabilities, assets, and equity.
• Liquidity: Liquidity is determined by comparing line items on a balance sheet. An income statement, in contrast, gives the operating income percentage, net income percentage, and gross margin percentage.
• Assessment: A company’s management uses a balance sheet to determine if a business can meet its obligations with sufficient liquidity. The income statement, however, is helpful to examine results and discover financial or operational issues.

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