Financial statements are official records that document the financial activities of a business. They provide a view into the financial condition as well as the profitability of the business. Financial statements are prepared as part of the accounting cycle.
There are four basic types of financial statements:
Balance Sheet Financial Statement
The Balance Sheet gives a snapshot overview of a company’s financial condition at a given point in time. (This differs from the other financial statements in that it is the only one that reflects a single point in time; the other statements report on activities over a period of time.
In fact, with a ‘beginning’ balance sheet and the other statements, you have enough information to build an ‘ending’ balance sheet for any period of time.)
Remember, it is called a ‘balance’ sheet because the amount of assets should equal (or ‘balance’) the sum of the liabilities and owner’s equity.
The Income Statement reports on a business’ profit and loss from operations over a given period of time. It can also be referred to as a Profit and Loss Statement or P&L Statement. Depending on financial requirements, businesses will prepare either a Single-Step Income Statement or a Multi-Step Income Statement.
Statement of Retained Earnings
The Retained Earnings Statement shows the changes in the owner’s equity in a business over a given period of time by highlighting the equity positions at the beginning and end of the reporting period.
Statement of Cash Flow
The Cash Flow Statement reports on a business’ cash flow from operations, financing, and investment activities over a given period. It shows how money has flowed into and out of the company, and generally demonstrates the short-term viability of the company’s cash position.
The statement of cash flow also explains how the cash position can change independently of profit — $1 million in sales on credit can make the income statement profitable, but without the cash the company might be in dire financial straits.