The Four Financial Statements
Updated: Sep 9, 2019
Information about assets, liabilities, expenses, and revenues is important for a business’s operations. This information is formatted into four different financial statements, which are the backbone of financial accounting.
The income statement reports a business's revenue, expenses, and resulting net income or loss during a specific period of time. Why is the income statement important? It is because investors and creditors use the income statement to predict the future of the business or company.
Investors are interested in a business’s past net income because the statement can provide valuable information for predicting future net income. In bigger companies, most investors buy and sell stock based on the research of the company’s performance and if their performances in the future will become better.
Creditors use the income statement to predict future earnings. For example, when a business needs to take out a bank loan for investments, a bank will look over the business income statement to ensure themselves if this business can repay the loan in the future.
Helpful Tip: Amounts received from issuing stocks are not revenue, and amounts paid out in dividends are not expenses. They do not get reported on an income statement.
Retained Earnings Statement
What is retained earnings? Retained earnings is the amount of net income left over for the business after it has been paid out to its shareholders. The retained earnings statement displays the amounts and causes of changes in the retained earnings in a specific time period. It helps users determine the company or corporation’s policy towards dividends and growth.
The time period is the same as the income statement. The beginning amount appears on the first line, then adds the amount of net income and deducts dividends to determine the retained earnings at the end of the period.
Helpful Tip: If a company has a net loss, it deducts rather than adds that amount in the retained earnings statement.
The balance sheet reports assets, liabilities, and stockholder’s equity at a particular point in time. This financial statement reports what the business owns and owes, as well as amounts invested by shareholders. Each account consists of several smaller sub-accounts to display the specifics of the business's finances. The balance sheet follows the basic accounting equation to give accurate information for the business to figure out what they own and what they need to pay.
BASIC ACCOUNTING EQUATION
Assets = liabilities + stockholder's equity
Statement of Cash Flows
A statement of cash flows is financial information that reports cash generated and spent during a specific period of time, and shows the effect of the financing, operating, and investing activities of the business. The cash flow statement is like a bridge between the income statement and balance sheet, reporting how money moves in and out of a business.
Operating cash flow presents a list of sales, capital expenditures, etc.or reconciliation from profit into cash flow. Investing cash flow reports any cash flows used for buying or selling PPE (Property, Plant, and Equipment), assets, and non-current assets. Financing cash flow displays the changes in size and composition of cash borrowing or earned. It includes bank loans, buying back shares, and payments of dividends.
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