The 3 Key Financial Statements
What Are Financial Statements?
Financial statements are formal documents that summarize a company’s business activities and financial performance. These statements are reviewed by regulatory agencies, accountants, and auditors. Investors and analysts rely on this critical information to assess the company’s prospects and stock performance.
Financial statements are integral to a company’s audit and annual report, making them one of the most essential tools in finance. The three primary financial statements are:
- Balance Sheet
- Income Statement
- Cash Flow Statement
| Financial Statement | Time | Purpose | Measures | Starting Point | Ending Point |
|---|---|---|---|---|---|
| Income Statement | Period of time | Profitability | Revenue, expenses, profitability | Revenue | Net income |
| Balance Sheet | A point in time | Financial position | Assets, liabilities, equity | Cash balance | Retained earnings |
| Cash Flow Statement | Period of time | Cash movements | Cash inflows & outflows | Net income | Cash balance |
Balance Sheet: An Overview
Formula: Assets = Liabilities + Owner’s Equity
The balance sheet provides a snapshot of a company’s financial position by summarizing its assets, liabilities, and shareholders’ equity. This statement is typically prepared at the end of the fiscal year. The balance sheet illustrates how a company funds its operations and lists assets in order of liquidity.
Key Components of a Balance Sheet:
- Assets: Includes cash, cash equivalents (e.g., certificates of deposit), accounts receivable, and inventory.
- Shareholders’ Equity: Represents the remaining assets after liabilities are subtracted. It reflects the amount that would be returned to shareholders if all assets were liquidated and debts paid.
- Liabilities: Comprises debts such as long-term loans, wages payable, and dividends payable.
Income Statement: Why It’s Crucial
Formula: Net Income = Revenue − Expenses
The income statement covers a specific time period and provides insight into a company’s revenues, expenses, net income, and earnings per share. Typically, it includes two to three years of data for comparison. This is often the first statement investors or analysts review to gauge business performance, as it highlights sales revenue and profitability.
Also called the profit and loss statement or statement of revenue and expenses, this document shows the company’s financial results and profitability.
Components of an Income Statement:
- Revenue:
- Operating Revenue: Earned from core business activities, like selling products or services.
- Non-Operating Revenue: Generated from non-core activities, such as interest income, rental income, or advertising revenue.
- Expenses: Includes costs like the cost of goods sold (COGS), selling and administrative expenses, depreciation, and research and development. Typical expenses include wages, sales commissions, and utilities.
Cash Flow Statement: What It Tells You
The cash flow statement tracks the movement of cash in and out of a company. It evaluates the company’s ability to generate cash to pay debts, fund operations, and support investments. This statement complements the balance sheet and income statement, offering a complete view of financial health.
Unlike the balance sheet or income statement, the cash flow statement doesn’t follow a specific formula but is divided into three main sections:
- Operating Activities: Cash generated or used by day-to-day business operations.
- Investing Activities: Cash inflows and outflows from long-term investments.
- Financing Activities: Cash from investors or lenders and outflows to shareholders.
How NOW CFO Can Help with Financial Statements
Our team specializes in creating accurate financial statements promptly, ensuring compliance with regulatory agencies, auditors, lenders, and investors. With the assistance of our financial reporting manager consultants, you can build confidence and present your company’s financials effectively.
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- Free Consultation
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