Financial statements consist of three different statements: income statement, balance sheet and cash flow statement. All three are necessary to provide an accurate overview of the financial stability and viability of a business. At the least, firms prepare annual financial statements, and most businesses compile them monthly or quarterly as well.
The income statement details income sources and expenses and shows the net income. The first section of the statement lists all income of the business. This usually breaks down into categories to show sources of income, which add up to a total income figure. The next section shows a total of all expenses associated with the business. For instance, most businesses will have salary and administration expense, utilities, lease or mortgage expense and taxes. The final category shows net income, derived by subtracting total expenses from total income.
The balance sheet of a business reveals its net worth. This is the difference between all assets and all liabilities. Some businesses are generic in this statement and simply list generalized categories of assets and liabilities, with the asset category being first on the statement. Larger businesses break down the asset and liability categories into current and non-current or short-term and long-term. Current or short-term applies to assets easily converted to cash, and liabilities that are due within 12 months. Non-current or long-term apply to assets not easily converted to cash, and liabilities not due within 12 months. Assets minus liabilities equal the company’s net worth.
Cash Flow Statement
The cash flow statement shows the cash that flows in and out of the business. This is actual cash and does not include credit, loans, payables or receivables not yet received or paid out. Cash inflows list first followed by cash outflows. The difference between the two should correspond to the bank account balances of the business.