Benefit of a Financial Statement
A financial statement is a report that informs a reader about an organization's economic standing, its business performance, and top management's financial estimates and assumptions. A financial statement also explains what sources of funds a corporation uses to finance operations, short-term investments and long-term initiatives, and transactions in owners' accounts.
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Function
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A financial statement helps identify a corporation's revenues and expenses during a period and clarifies what major customers and suppliers are its trade partners. This statement also may inform about an organization's financial position at a specific date such as the end of the year. A financial report also may display various sources of funds an entity uses to finance operating activities.
Types
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There are four types of financial statements---a balance sheet (or statement of financial position), a statement of profit and loss (also called P&L statement or statement of income), a statement of cash flows and a statement of shareholders' equity (also known as statement of retained earnings or equity statement).
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Significance
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A financial statement is important in evaluating a company's economic health. Without this report, investors and regulators as well company managers may not be able to adequately assess business performance or competitive standing and make useful projections. A financial statement also helps other corporations or investment groups value the company in a merger or acquisition (M&A) transaction.
Balance Sheet
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A balance sheet presents a corporation's financial position at a given point in time such as the end of a quarter or a year. This reports has three components---assets, liabilities and equity. Assets are a company's resources (e.g., cash or accounts receivables). Liabilities are also called debt (e.g., salaries or bonds payable). Equity accounts display owners' investments in a company.
Income Statement
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The income statement lists revenues, expenses and net income for a period---typically a month, quarter or year. Revenue may be sales or interest income. Expenses may be cost of sales or salaries. Net income equals total revenues minus total expenses.
Statement of Cash Flows
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The statement of cash flows informs a reader about cash receipts and payments that occur during a period. These cash transactions relate to operating transactions (e.g., paying salaries), investing activities (e.g., buying a new machine) and financing deals (e.g., issuing stocks or bonds to investors on a securities exchange).
Statement of Shareholders' Equity
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The statement of shareholders' equity or statement of retained earnings explains monetary movements that occur in owners' accounts during a period. It lists the beginning equity balance, retained earnings (corporate internal funds), the net profit for the period, dividends paid to investors and the ending equity balance. For example, a firm that pays $10 million in dividends during a quarter will show such payments on a retained earnings statement.
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References
Resources
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