What are the Four Basic Financial Statements?

Four Basic Financial Statements

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Four Basic Financial Statements

The four basic financial statements used in business and finance are:

  1. Balance Sheet: Also known as the Statement of Financial Position, it shows what a company owns (assets) and owes (liabilities), as well as the amount invested by shareholders (equity) at a specific point in time. It follows the formula: Assets = Liabilities + Shareholder’s Equity.
  2. Income Statement: Also known as the Profit and Loss Statement, it shows the company’s revenues and expenses during a particular period. It starts with sales and works down to net income or loss.
  3. Cash Flow Statement: It shows the inflow and outflow of cash within a company for a specific period. It’s divided into three parts: cash flows from operating activities, investing activities, and financing activities.
  4. Statement of Shareholders’ Equity: Also known as the Statement of Retained Earnings or Equity Statement, it shows the changes in a company’s equity during a specific period. This includes new stock issuance, dividends paid, the impact of the net income earned during the period, and any other increases or decreases in equity.

These financial statements are used by investors, market analysts, and creditors to evaluate a company’s financial performance and make decisions about investment, credit, and audit.

Example of the Four Basic Financial Statements

A simplified example of each of the four basic financial statements:

  • Balance Sheet
    (As of December 31, 2023)
    • Assets:
      • Cash: $10,000
      • Accounts Receivable: $5,000
      • Inventory: $7,000
      • Property, Plant & Equipment: $20,000
    • Total Assets: $42,000
    • Liabilities:
      • Accounts Payable: $3,000
      • Short-term Loans: $5,000
      • Long-term Loans: $10,000
    • Total Liabilities: $18,000
    • Equity:
      • Share Capital: $15,000
      • Retained Earnings: $9,000
    • Total Equity: $24,000
  • Income Statement
    (For the Year Ended December 31, 2023)
    • Sales: $40,000
    • Cost of Goods Sold: $20,000
    • Gross Profit: $20,000
    • Operating Expenses: $10,000
    • Net Income: $10,000
  • Cash Flow Statement
    (For the Year Ended December 31, 2023)
    • Cash Flow from Operating Activities: $12,000
    • Cash Flow from Investing Activities: -$8,000
    • Cash Flow from Financing Activities: -$4,000
    • Net Increase in Cash: $0
  • Statement of Shareholders’ Equity
    (For the Year Ended December 31, 2023)
    • Beginning Equity: $20,000
    • Share Capital Issued: $5,000
    • Net Income: $10,000
    • Dividends Paid: -$1,000
    • Ending Equity: $34,000

Please note that these are extremely simplified examples. Real-world financial statements of companies can be much more complex with many more line items and details.

Also, this example assumes that all numbers are in dollars and that there are no currency conversions or other factors affecting the figures. In reality, there are often many such considerations to take into account.

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