What is a Financial Statement?
A financial statement provides business owners and top management with valuable data used for decision making and strategic planning purposes. The four standard financial statements used by companies include balance sheets, income statements, cash flow statements and equity statements.
Cash Flow Statements
A cash flow statement allows management to measure a business’s financial activities over specific periods of time. They are used to analyze the cash flowing in and out of individual departments and whole businesses. Cash flow statements are similar to old fashioned checkbook registers that people use for personal banking, but they track four major business activities. First, cash flow statements track the cash flows from operating activities.
This includes cash received from customers and interest received on investments as well as cash paid out for taxes, employees and suppliers. Second, they track cash flows from sales and investing activities related to assets, property and equipment. Third, they track cash flows from financing activities like the sales of stock in the business and short- and long-term loans. Fourth, they track the increases and decreases of cash by adding up all income and outflows in order to calculate a net increase or decrease in cash available to the business.
Statement of Owners’ Equity
These equity statements detail any changes in retained earnings that appear on the balance sheet. Equity statement results are primarily influenced by income and dividends. This statement reports changes in the balance sheet’s equity section during an accounting period. This means that this accounting document details the financial events that increase or decrease the stockholder’s equity during designated periods of time.
The statement of owner’s equity is one of the shortest financial statements because of the limited amount of transactions that affect equity accounts. They typically list the net loss or income along with the business owners’ contributions or withdrawals during the accounting period. This financial document starts with the opening balance for the accounting period, then lists any additions to or deductions from the business owner’s equity account and concludes with a final balance.
Balance sheets track either fixed or current assets. Current assets can be easily and quickly liquidated into cash. They include inventory, accounts receivable, notes receivable, marketable securities and prepaid assets. Liabilities represent assets that are technically owed to creditors. They may be current, or short-term liabilities, like accounts, notes, interest, wages and taxes payable. The equity in a balance sheet is either for sole proprietorships, partnerships, stockholders or shareholders.
A business’ equity owners are the residual claimants, which mean they have a legal right to what remains after any creditors have been paid. Business owners, who are in a partnership or sole proprietorship, will have their names listed in the equity section. The financial data contained in balance sheets are used to calculate basic financial ratios that determine the financial health and performance of the business. They are used to identify financial trends and implement strategies to strengthen accounting practices.
Income statements are sometimes referred to as statements of revenue and expense. They clarify the company’s actual ROI and business costs. This financial statement is usually prepared at the end of every business year. The SEC offers an overview of financial statements here.
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