Financial statements are tools that allow business owners and stakeholders to gain a clear understanding of the financial position of a company. The three most important financial statements are the balance sheet, income statement and statement of cash flows. Each of these financial statements includes unique information that is housed within specific classifications to ensure financial information is organized and easy to understand.
The balance sheet is a snapshot of the financial standing of a business on a particular date. There are three classifications used on this financial statement: assets, liabilities and equity. Assets include anything the business owns or money that the business holds. This includes cash, accounts receivable, inventory, property and equipment, among others. Liabilities include anything the business owes to another organization or individual. Items that would fall under this classification include all accounts payable. The final classification, equity, includes stock and retained earnings.
The income statement is a summary of the operational activities of a company during a certain period of time. There are two classifications used on this financial statement: revenues and expenses. Revenues include all money made by the business during a certain period of time. Examples of items that would fall under this classification include sales and advertising revenue. Expenses include all money spent by a business during a certain period of time, including, but not limited to, salaries, utilities, advertising, interest, taxes and depreciation. These two classifications are compared to determine the company’s net income or loss.
The statement of cash flows provides the information necessary to analyze the flow of cash in and out of a business. All cash transactions during a certain period of time are summarized and filed under one of three classifications: operating activities, investing activities or financing activities. Operating activities are those that are related to providing the goods or services that the company offers. Investing activities are all activities related to lending money or buying assets, such as property or equipment. Finally, financing activities include activities related to borrowing money, paying off loans or paying dividends to stockholders.
