Financial Statements
Financial statements are written reports that provide information about a company’s financial performance, financial position, and cash flows over a specific period of time. They are a key tool for investors, creditors, and others to understand the financial health of a company. There are typically four main financial statements:
- Balance Sheet: Also known as the statement of financial position, the balance sheet provides a snapshot of a company’s financial position at a particular point in time. It shows the company’s assets (what it owns), liabilities (what it owes), and equity (the difference between assets and liabilities, representing the owner’s share).
- Income Statement: Also known as the statement of earnings or the profit and loss statement, the income statement shows the company’s revenues, costs, expenses, and net income or loss over a period of time. It tells you how much money the company made or lost during the period.
- Cash Flow Statement: This statement shows the cash inflows and outflows from the company’s operating, investing, and financing activities over a period of time. Unlike the income statement, which is based on the accrual method of accounting, the cash flow statement provides information about the company’s cash receipts and cash payments.
- Statement of Changes in Equity: Also known as the statement of retained earnings, this statement shows how a company’s equity has changed over a period of time. It includes changes due to net income, dividends paid, issuance or repurchase of shares, and other transactions affecting equity.
These statements are prepared based on the company’s accounting records and are usually compiled in accordance with standard accounting principles, such as Generally Accepted Accounting Principles (GAAP) in the United States or International Financial Reporting Standards (IFRS) in many other countries.
Together, these financial statements provide a comprehensive view of a company’s financial health and performance. They are essential for managers to make informed decisions, for investors and creditors to evaluate the company’s financial risk and return potential, and for regulatory authorities to ensure compliance with financial disclosure regulations.
Example of Financial Statements
Here’s a simplified example for each of the four main financial statements using a fictional company called “BikeShop Co.” Please note, the numbers used here are purely illustrative.
1. Balance Sheet At the end of 2023, BikeShop Co.’s balance sheet might look like this:
Assets
- Cash: $50,000
- Accounts Receivable: $20,000
- Inventory: $30,000
- Property, Plant, and Equipment (net): $100,000
- Total Assets: $200,000
Liabilities
- Accounts Payable: $20,000
- Bank Loan: $50,000
- Total Liabilities: $70,000
Equity
- Common Stock: $50,000
- Retained Earnings: $80,000
- Total Equity: $130,000
This tells us that BikeShop Co.’s assets are funded by $70,000 in liabilities and $130,000 in equity.
2. Income Statement For the year 2023, BikeShop Co.’s income statement might look like this:
- Sales: $200,000
- Cost of Goods Sold: -$120,000
- Gross Profit: $80,000
- Operating Expenses: -$40,000
- Operating Income: $40,000
- Interest Expense: -$5,000
- Pre-Tax Income: $35,000
- Taxes (30%): -$10,500
- Net Income: $24,500
This tells us that BikeShop Co. earned $24,500 in net income during 2023.
3. Cash Flow Statement For the year 2023, BikeShop Co.’s cash flow statement might look like this:
Cash from Operating Activities
- Net Income: $24,500
- Changes in Working Capital: $5,000
- Depreciation: $10,000
- Total Cash from Operating Activities: $39,500
Cash from Investing Activities
- Capital Expenditures: -$20,000
- Total Cash from Investing Activities: -$20,000
Cash from Financing Activities
- Repayment of Bank Loan: -$10,000
- Total Cash from Financing Activities: -$10,000
Net Increase in Cash: $9,500
This tells us that BikeShop Co.’s cash position increased by $9,500 during 2023.
4. Statement of Changes in Equity For the year 2023, BikeShop Co.’s statement of changes in equity might look like this:
- Beginning Retained Earnings: $55,500
- Net Income: $24,500
- Dividends Paid: -$10,000
- Ending Retained Earnings: $70,000
This tells us that BikeShop Co.’s retained earnings (undistributed profits) increased by $14,500 during 2023.
These simplified financial statements provide an overview of BikeShop Co.’s financial position and performance during 2023. In reality, financial statements of companies are more complex and contain more line items and details, including notes and disclosures.
