Overview of the Four Financial Statements in Basic Terms
There are four important financial statements issued on behalf of a business; they summarize the business’s financial activities during a specific time or time period. The Generally Accepted Accounting Principles (GAAP) adheres to the four main financial statements; Balance Sheet, Income Statement, Statement of Cash Flows and Statement of Owner’s Equity. Private companies and small businesses aren’t required to prepare financial statements but they do aid in such operations such as financing and investing.
Accounting Financial Statements Examples
The balance sheet is a snapshot of a company at a specific given time. The balance sheet comprises of assets, liabilities and owner’s equity. The statement gives management and investors an idea of what a company has, owes and shareholders investments. Typically, assets are listed on the left side of the balance sheet while the liabilities and owner’s equity is listed on the right side. Liabilities plus owner’s equity must equal to the assets.
Balance sheet summary;
- Assets = Liabilities + Equity
- Figures on the balance sheet reflect a company’s position at a specific point in time
- Fixed assets are listed at their original cost, not current value
- Current assets can be liquidated within 1 year
- Current liabilities must be paid within 1 year
- Retained earning represent income left after dividends are paid out
The income statement shows how much revenue earned over a specific time period, typically one year. Included in the income statement is expenses and costs associated with earning the revenue. The bottom line reflects the net earnings or losses during the specific time. In other words, what the company made or lost. Income Statements also report the earnings per share (EPS). This is the total amount shareholders would receive if the company decided to distribute all of its net earnings for the period. The key word is “if” because companies never pay out all of their earnings, instead they reinvest it into the business.
Income statement summary;
- Net Income = Revenue – Expenses
- The income statement tracks changes over a period of time
- Income doesn’t mean cash
- Expenses include non-cash items
- Revenues may include cash that is not received yet
- Net income minus dividends equals retained earnings
Statement of Cash Flows
The statement of cash flows summarizes the source and uses of cash. For a private business, this statement may contain only two sections; the cash inflows and cash outflows. Cash inflows include sales paid in cash, receivables collected and income from investments. Cash outflows are salaries, interest & line of credit payments, rent, purchases in inventory and utilities.
This statement is beneficial to the owner or management because it shows if there is enough cash on hand to meet its expenses, potential purchase of assets and investments.
Statement of cash flows summary;
- Cash flows are based on operating, investing and financing activities
- Cash flows track changes over time
- Cash flows lead to the amount of cash generated or lost during a certain period
Statement of Owner’s Equity (Statement of Retained Earnings)
Statement of retained earnings or owner’s equity reports the changes in owner’s equity between accounting periods. It is expressed on the Balance Sheet. Additions include the net income and additional investments made by the owner. Subtractions include dividends paid out and withdrawals made by the owner.