Financial statements are documents that concisely communicate the monetary situation of a business. Different statements describe different areas of the business’s financial situation.
The four key financial statements are:
- The Income Statement
- The Statement of Owner’s Equity
- The Balance Sheet
- Statement of Cash Flow
The income statement describes how much profit a business earns over a period of time. This document shows the amounts for revenue, expenses, and net income or net loss.
The statement of owner’s equity describes all changes in owner’s equity over a period of time. This document shows the amounts for owner’s investments, owner’s withdrawals, net income, and net loss.
The balance sheet describes the financial situation of a business at a given time. This document shows the assets, liabilities and owner’s equity.
The statement of cash flow describes the amount of cash going in and out of the business over a period of time. This document shows the movement of cash in operating, investing, and financing activities.
Financial statements are important as communication tools. They report on a business’s financial situation from different perspectives. Many people depend on these reports, such as banks, partners, investors, suppliers, managers, customers, shareholders, and board of directors.Financial statement analysis involves using these financial statements along with other relevant information to make various decisions. For example, an investor will perform financial statement analysis to analyse whether it’s a good investment. Similarly, a bank will analyse the financial position of a firm to understand their financial requirements and payback capacity.