The financial statements are a set of reports that companies prepare to provide information about their financial performance and position to internal and external stakeholders. There are four main financial statements that companies prepare: the income statement, the balance sheet, the cash flow statement, and the statement of changes in equity. In this response, I will describe the purpose of each of these financial statements in detail.
- Income Statement: The income statement, also known as the profit and loss statement, reports a company’s revenue and expenses over a specified period. Its purpose is to provide information about a company’s profitability and its ability to generate income from its operations. The income statement starts with revenues, followed by the cost of goods sold (COGS) or cost of services provided, gross profit, operating expenses, and income taxes. The final figure is net income or net loss, which represents the company’s bottom line. Investors and analysts use the income statement to evaluate a company’s financial performance over a specific period and to compare it with previous periods.
- Balance Sheet: The balance sheet is a snapshot of a company’s financial position at a specific point in time. It lists a company’s assets, liabilities, and equity. Its purpose is to provide information about a company’s liquidity, solvency, and financial flexibility. The balance sheet consists of two sections: the assets section and the liabilities and equity section. The assets section lists the company’s current and non-current assets, such as cash, accounts receivable, inventory, and property, plant, and equipment (PP&E). The liabilities and equity section lists the company’s current and long-term liabilities, such as accounts payable, notes payable, and long-term debt, as well as the equity section, which includes common stock, retained earnings, and other equity accounts. Investors and analysts use the balance sheet to assess a company’s financial position, including its liquidity, solvency, and financial flexibility.
- Cash Flow Statement: The cash flow statement reports a company’s cash inflows and outflows over a specified period. Its purpose is to provide information about a company’s ability to generate cash and to meet its financial obligations. The cash flow statement consists of three sections: operating activities, investing activities, and financing activities. The operating activities section reports cash inflows and outflows from a company’s primary operations, such as sales, accounts receivable, accounts payable, and inventory. The investing activities section reports cash inflows and outflows from a company’s investments, such as the purchase or sale of PP&E or investments in other companies. The financing activities section reports cash inflows and outflows from a company’s financing activities, such as the issuance or repurchase of stock, the payment of dividends, or the repayment of debt. Investors and analysts use the cash flow statement to assess a company’s ability to generate cash, to meet its financial obligations, and to fund its growth.
- Statement of Changes in Equity: The statement of changes in equity, also known as the statement of stockholders’ equity, reports changes in a company’s equity over a specified period. Its purpose is to provide information about a company’s capital structure, including changes in common stock, retained earnings, and other equity accounts. The statement of changes in equity consists of three sections: beginning balance, changes during the period, and ending balance. The beginning balance section reports the balances of each equity account at the beginning of the period. The changes during the period section reports changes in each equity account, such as stock issuances or repurchases, dividends, and net income or net loss. The ending balance section reports the balances of each equity account at the end of the period. Investors and analysts use the statement of changes in equity to assess a company’s capital structure and to track changes in equity accounts over time.