Financial Statements

Records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements.

Example of a Financial Statement

It is a 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. As well, financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing or investing purposes. Financial statements are integral to ensuring accurate and honest accounting for businesses and individuals alike.

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.

View detailed explanation and Example of Statement of Financial Position

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.

View detailed explanation and Example of Income Statement

3. Cash Flow Statement 
   
   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.

View detailed explanation and Example of Cash Flow Statement

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