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Definition
A financial statement is a formal record of a company’s financial activities and position. It provides a snapshot of the company’s financial performance and health over a specific period, usually a quarter or a year.
What are financial statements?
Financial statements are essential tools for assessing a company’s financial status, making informed investment decisions, and evaluating its overall viability.
There are three primary types of financial statements:
1. Income statement (profit and loss statement): This statement summarises a company’s revenues, expenses, and profits (or losses) over a given period. It shows how much money the company generated from its operations and the costs incurred to generate that revenue. The difference between total revenue and total expenses yields the net income (or net loss) for the period.
2. Balance sheet (statement of financial position): The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It lists the company’s assets (what it owns), liabilities (what it owes), and shareholders’ equity (the residual interest in the company’s assets after deducting liabilities). The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity.
3. Cash flow statement: This statement details the inflows and outflows of cash and cash equivalents during a specified period. It categorises cash flows into operating activities (day-to-day business operations), investing activities (acquiring or disposing of assets), and financing activities (raising capital or repaying debt). The cash flow statement provides insights into a company’s liquidity and cash management.
Financial statements are crucial for investors, creditors, regulators, and management to assess a company’s financial performance, make informed decisions, and ensure compliance with financial reporting standards. They offer a comprehensive view of a company’s financial health, its ability to generate profits and cash flow, and its overall stability.
Example of financial statement
A financial statement typically includes three main components: the income statement, the balance sheet, and the cash flow statement. Here’s a simplified example of each:
Income Statement:
| Revenue | $100,000 |
| Expenses | -$70,000 |
| Net income | $30,000 |
In this example, the company earned $100,000 in revenue and incurred $70,000 in expenses, resulting in a net income of $30,000.
Balance sheet
| Assets | Liabilities | Equity |
| Cash: $20,000 | Loans: $40,000 | Owners equity: $80,000 |
| Inventory: $30,000 | ||
| Equipment: $50,000 | ||
| Total assets: $100,000 | Total liabilities & equity: $120,000 | Total liabilities & equity: $120,000 |
This balance sheet shows the company’s assets (cash, inventory, equipment) and how they are financed through liabilities (loans) and owner’s equity.
Cash flow statement
| Operating activities | Cash inflows | Cash outflows | Net cash flow |
| Cash from sales | $100,000 | $100,000 | |
| Operating expenses | -$70,000 | $30,000 | |
| Investing activities | -$20,000 | -$20,000 | |
| Financing activities | -$30,000 | -$30,000 | |
| Net cash flow | $50,000 |
This cash flow statement summarises how cash is generated and used in different business activities, including operations, investments, and financing.
These statements provide a snapshot of a company’s financial health and performance during a specific period. Keep in mind that real financial statements are more detailed and may include additional line items and notes.
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