According to the U.S. Securities and Exchange Commission, SEC, the U.S. Generally Accepted Accounting Principles, GAAP, require public companies to file four different financial statements with the SEC on a quarterly or annual basis. These financial statements include a balance sheet, an income statement, a cash flow statement and a statement of owner’s equity, although, companies will sometimes add their equity statement to their balance sheet. Investors use financial statements to determine the short- and long-term financial position of a company.
A balance sheet gives an overall picture of a company’s financial situation by showing the total assets of a business, including liabilities plus equity. Current assets can include cash, accounts receivable, inventory and prepayments for insurance. Fixed assets can include property, capital equipment and the depreciation -- declining value -- of property. Short-term liabilities encompass accounts, wages and taxes payable, and long-term liabilities can include mortgages and bonds. Equity refers to an owner’s stake in a business for a sole proprietorship or partnership and to shareholder equity for a corporation.
Income statements show the net income of the business after paying out expenses, which can include product acquisition, wages, advertising, taxes and capital losses. An income statement lists gross income on the first line and net income on the last line with a list of expenses sandwiched in the middle. According to the SEC, most corporations include earnings per share, EPS, on an income statement to show shareholders the ratio of the stock price compared to the profit per share.
Cash Flow Statement
While an income statement and a balance sheet offer a detailed overview of a company’s financial track record, most investors need to know how well the company manages cash inflows and outflows because companies must have adequate cash to pay for expenses and purchases. A cash flow statement shows the amount of increase or decrease in cash that the company has on hand every quarter. Companies report their cash flow from operating activities, including the sale of products and services; investing activities, including the purchase or sale of capital equipment and property; and financing activities, including the sale of stocks and bonds or taking out a loan from a lender.
Corporations usually incorporate a statement of owner’s equity, alternatively called a statement of retained earnings, into their balance sheet. Companies may create a separate equity statement that shows the equity of shareholders or owners at the end of a financial period, which includes the value of each share plus gains or minus losses and the withdrawal of or addition to company funds on the part of owners and shareholders.
Chris Hamilton has been a writer since 2005, specializing in business and legal topics. He contributes to various websites and holds a Bachelor of Science in biology from Virginia Tech.