A financial statement is a formal record of the financial activities and position of a business, person, or other entity. It is a report that shows the financial activities and performance of a business, and it is used by lenders, investors, and other stakeholders to evaluate a companys financial health and earnings potential. Financial statements are often audited by external parties to ensure their accuracy and reliability. There are four main types of financial statements in accounting:
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Balance Sheet: A snapshot of a companys financial condition at a single point in time, it shows what the company owns (assets) versus what it owes (liabilities). The difference between the two is often used as a starting point for valuing a business.
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Income Statement: Also called a profit and loss statement, this report shows a companys revenues and expenses. Expenses are subtracted from revenues to show the companys profit or loss figure, also known as net income.
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Cash Flow Statement: Also called a statement of cash flows, this report shows the exchange of money between a company and the outside world over a period of time. It provides information on how much cash a company generates and how it is used.
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Statement of Shareholders Equity: This report shows changes in the interests of a companys shareholders over time.
Financial statements should be understandable, relevant, reliable, and comparable. Depending on the corporation, the line items in a financial statement will differ; however, the most common line items are revenues, costs of goods sold, taxes, cash, marketable securities, inventory, short-term debt, long-term debt, accounts receivable, accounts payable, and cash flows from investing, operating, and financing activities.
