Four Types of Financial Statements

The four main types of financial statements are:

1. Statement of Financial Position

Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a given date. It is comprised of the following three elements:

  • Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery, etc)
  • Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)
  • Equity: What the business owes to its owners. This represents the amount of capital that remains in the business after its assets are used to pay off its outstanding liabilities. Equity therefore represents the difference between the assets and liabilities.

2. Income Statement

Income Statement, also known as the Profit and Loss Statement, reports the company’s financial performance in terms of net profit or loss over a specified period. Income Statement is composed of the following two elements:

  • Income: What the business has earned over a period (e.g. sales revenue, dividend income, etc)
  • Expense: The cost incurred by the business over a period (e.g. salaries and wages, depreciation, rental charges, etc)

Net profit or loss is arrived by deducting expenses from income.

3. Cash Flow Statement

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Cash Flow Statement, presents the movement in cash and bank balances over a period. The movement in cash flows is classified into the following segments:

  • Operating Activities: Represents the cash flow from primary activities of a business.
  • Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories (e.g. purchase of a factory plant)
  • Financing Activities: Represents cash flow generated or spent on raising and repaying share capital and debt together with the payments of interest and dividends.

4. Statement of Changes in Equity

Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the movement in owners’ equity over a period. The movement in owners’ equity is derived from the following components:

  • Net Profit or loss during the period as reported in the income statement
  • Share capital issued or repaid during the period
  • Dividend payments
  • Gains or losses recognized directly in equity (e.g. revaluation surpluses)
  • Effects of a change in accounting policy or correction of accounting error

Link between Financial Statements

The following diagram summarizes the link between financial statements.

Relationship between financial statements

CBSE Class 12 Commerce Accountancy Financial Statements Of A Company Complete Information

CBSE Class 12 Commerce Accountancy Financial Statements Of A Company : Financial statements for businesses usually include income statements, balance sheets, statements of retained earnings and cash flows. It is standard practice for businesses to present financial statements that adhere to generally accepted accounting principles (GAAP) to maintain continuity of information and presentation across international borders. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing or investing purposes.

BREAKING DOWN ‘Financial Statements’

Financial analysts rely on data to analyze the performance of, and make predictions about, the future direction of a company’s stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm’s financial statements. The three main financial statements are the income statement, balance sheet and cash flow statement.

Balance Sheet

The balance sheet provides an overview of assets, liabilities and stockholders’ equity as a snapshot in time. The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the fiscal year. The balance sheet equation is assets equals liabilities plus stockholders’ equity, because assets are paid for with either liabilities, such as debt, or stockholders’ equity, such as retained earnings and additional paid-in capital. Assets are listed on the balance sheet in order of liquidity. Liabilities are listed in the order in which they will be paid. Short-term or current liabilities are expected to be paid within the year, while long-term or noncurrent liabilities are debts expected to be paid after one year.

Income Statement

Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement provides an overview of revenues, expenses, net income and earnings per share. It usually provides two to three years of data for comparison.

Cash Flow Statement

The cash flow statement merges the balance sheet and the income statement. Due to accounting convention, net income can fall out of alignment with cash flow. The cash flow statement reconciles the income statement with the balance sheet in three major business activities. These activities include operating, investing and financing activities. Operating activities include cash flows made from regular business operations. Investing activities include cash flows due to the buying and selling of assets such as real estate and equipment. Financing activities include cash flows from debt and equity. This is where analysts can also find the amount of dividends paid and/or dollar value of shares repurchased.

CBSE Class 12 Commerce Accountancy Financial Statements Of A Company Complete Information

CBSE Class 12 Commerce Accountancy Financial Statements Of A Company : These pages provide investors with published fundamental information about a company. The financials include Income Statements, Balance Sheets, Statements of Cash Flow and Financial Ratios both on a quarterly and an annual basis.

Term Definition
Income Statement Often referred to as a Statement of Profit and Loss, or P&L, this financial report shows the revenues and expense generated and incurred by a company over a specified period of time. It shows the net gain or loss from the company’s equity position during the stated accounting period.
Balance Sheet This report presents a snapshot of the company as of a single date, most often the last day of a quarter or year. It shows the accounting value of all of the company’s assets, liabilities and shareholder’s equity as of that date.
Cash Flow Statement This report presents an analysis of all activities during the accounting period that affected cash, impacted primarily by operations, financing and investments.
Financial Ratios These ratios are calculated from the reported figures in the financial statements. They are used to analyze the relative financial health of the company as compared to other similar companies. They can be compared over time within the same company to spot trends and evaluate risks, especially when deviating from companies in the same or similar risk categories.

CBSE Class 12 Commerce Accountancy Financial Statements Of A Company Complete Information