Financial statements are official records of the financial activities and operating results of a business within a specific period. These statements give an idea about the financial position of a business in terms of its assets, liabilities, revenues, and cash flows that are essential for investors, creditors, and government agencies for making investment decisions.
Types Of Financial Statements
Financial statements have to be prepared according to the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) to provide an overview of the financial health of the organization. There are four main types of financial statements as follows:
Balance Sheet
The balance sheet gives the statement of the financial position of a business at a certain period. It provides information on assets, liabilities, and equity; giving a view of the company’s financial health. This is helpful in determining the company’s level of solvency and financial security by comparing the assets and liabilities on the balance sheet. This document is useful to determine if the company has sufficient resources to cover its liabilities and if it is financially stable. The balance sheet can also be used in analyzing investment opportunities, and borrowing and lending prospects.
Income Statement
The income statement which is also known as the profit and loss statement shows the revenue, costs, and profits of a business within a certain period of operation. Income statement is vital for establishing the company’s profitability, monitoring the performance, and comparing different financial initiatives. Income statement helps in making better decisions in a business, through determining more effective and efficient ways of minimizing cost, making budget forecasts, and determining potential future incomes.
Cash Flow Statement
Cash flow statement also shows the cash received and paid for the operations, investments and other financing activities. This is useful in identifying the liquidity position of a company, solvency and in management of cash flow. A proper cash flow statement can guide to predict future cash requirements with respect to assets, liabilities, and working capital effectively.
Statement of Changes in Equity
The statement of changes in equity shows how a company’s equity has increased or decreased over a period of time through retained profits, new shares issuing or any repurchase of the shares.It analyzes the company’s financial statement and changes in its equity to help the stakeholders understand how financial operations influence ownership and value.