Four Types of Financial Statements: Definition, Examples, Objectives

For instance, in the US, publicly traded companies must file audited financial statements. Similarly, in New Zealand, financial statements submitted to the Companies Office must be audited. In Hong Kong, the Hong Kong Companies Registry mandates auditing for all companies. Financial statements are a compilation of written records that display a company’s financial activities and performance at a specific time, usually annually, quarterly, or monthly. The purpose is to provide the company’s financial position information to internal and external stakeholders. The balance sheet is a financial statement that provides a snapshot of the assets, liabilities, and shareholders’ equity.

Balance sheet shows the company’s financial condition at a given point in time. It presents the balance of the company’s assets, liabilities, and equity which follow the accounting equation. Generally Accepted Accounting Principles (GAAP) are guidelines that companies must follow when preparing financial statements. GAAP includes standards for things like recognition, measurement, and disclosure. GAAP can impact financial statements on how revenue is recognized and expenses are reported.

Do not reflect current situation

The basic objective of these statements is to provide information required for decision making by the management as well as parties who are interested in the affairs of the undertaking. Statement of cash flows show the company’s cash inflows and cash outflows from three activities including operating activities, investing activities and financing activities during the accounting period. Reported assets, liabilities, equity, income and expenses are directly related to an organization’s financial position. When financial statements are issued to outside parties, then financial statements simple definition also include supplementary notes.

The Accounting Equation

Many companies use the shareholders’ equity as a separate financial statement. The income statement shows the reader the financial performance of the business over a specific period of time. The fiscal policies, particularly taxation policies of the government, are related with the financial performance of corporate undertakings. The financial statements provide basic input for industrial, taxation and other economic policies of the government.

Financial Planning and Analysis (FP&A)

• They include the income statement, balance sheet, and statement of cash flows.
• Financial statements show aggregate information but not detailed information.
• Naturally, audited financial statements are more credible, but they require additional time and cost to prepare.
• These are compiled using Generally Accepted Accounting Principles (GAAP).
• Operating revenue is generated from the core business activities of a company.
• However, some companies may prepare them more frequently if they are required to do so.
• The Statement of Financial Position is a snapshot of the financial health of a business at specific dates.

And right at the bottom of the page, more questions on financial statements submitted by fellow students, including a full company financial statements exercise with solutions. Though utmost care is taken in the preparation of the financial statements and provide detailed information to the users, they suffer from limitations. Trade associations may analyse the financial statements for the purpose of providing service and protection to their members. They may develop standard ratios and design uniform system of accounts.

Cash Flow From Operating Activities (CFO)

This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement equals the total equity reported on the balance sheet. Investors use this information to understand the profitability of a company and its stock. The cash flow statement (CFS) shows how cash is earned and spent by a company.

What is Accounting Equation? Example, Procedure of Forming

• An often less utilized financial statement, the statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income (OCI).
• The Income Statement lists the balances in all Revenue and Expense accounts.
• Lastly, annual financial statements are crucial for tax reporting and tax return filing.
• This statement presents revenues and expenes and finds out the profit or loss of the business.
• They may also need information to take decision about continuation or discontinuation of their investment in the business.
• The company’s assets would then equal its liabilities plus shareholders’ equity.

Though companies can have one statement to showcase their financial inflow and outflows, it is difficult for the stakeholders to depend on one record for making major decisions. Thus, they have to develop more than one statement to ensure the readers get a clear picture of their financial status and their performance. 6) Suppliers – Suppliers want to make sure that they will get paid by the business they are supplying goods to. For example, if the business looks like it might fall apart soon, the employee may want to start looking for another job. They may have even been given shares in the company they are working for, so will want to know that it’s doing well. As the name suggests, the balance sheet reflects the financial situation or financial position of a business at a specific point in time.

Credit granting institutions take decisions based on the financial performance of the undertakings. In addition, Balance sheet includes all assets, liabilities, and equity accounts of a business, while Statement of Cash Flows only focuses on the activities of Cash. Out of the four Financial Statements, Balance Sheet and Income Statement are the most standard set that almost every business would prepare. Statement of Cash Flows is also required in many situations but isn’t always needed for small businesses where owners already have a good sense of their cash activities. Statement of Changes in Equity is the least required as only large, publicly traded companies need to prepare it. There are four types of financial statements commonly used by businesses.