Financial Statements: List of Types and How to Read Them

Subtracting them from your assets gives you a rough idea of how much value your business really has to work with. In the example above, accounts payable—typically payments to vendors or contractors—could be considered a short term liability; you’ll probably pay them off each month. Financial advisors, investment gurus, CPAs, and authors of corporate annual reports may employ Einstein-level calculations to help their clients plan how to spend money. But in this guide, we’ll look at the most straightforward, essential ratios business owners use to analyze their companies’ financial statements and make day-to-day business decisions.

Assets are everything a company owns and can be used to generate revenue. They include cash, investments, inventory, and property, plant, & equipment (PP&E). This purchase will entail an increase in assets (equipment) and a liability (credit purchase) for the amount of $2,000. The company’s assets would then equal its liabilities plus shareholders’ equity.

Using the income statement in real life

The financial statement only captures the financial position of a company on a specific day. Looking at a single balance sheet by itself may make it difficult to extract whether a company is performing well. For example, imagine a company reports $1,000,000 of cash on hand at the end of the month.

Analyzing a balance sheet with financial ratios

Getting into the habit of reviewing financial statements and reports is essential and QuickBooks simplifies and streamlines this process to give you more time to focus on running your business. A financial statement is an important part of your financial accounting system. Making one of these common mistakes can affect the accuracy of your volunteer work tax deductions financial statements and business decisions. Your financial statements are based on personal judgments and Estimates to avoid overstating assets and liabilities.

Too often, it’s been documented that fraudulent financial activity or poor control oversight have led to inaccurate financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown. Below is a portion of ExxonMobil Corporation’s cash flow statement for fiscal year 2023, reported as of Dec. 31, 2023.

It provides essential insights into a company’s liquidity, solvency, and overall financial health. The statement of cash flows adds all cash inflows and outflows to find the net change in cash for a period. The cash flow statement’s ending cash balance should equal the ending cash balance in the balance sheet. This is the amount of money a company has left over after taking into account all non-operating items from the operating profit. It is the income statement’s bottom line and represents the company’s total earnings or losses for a period of time. Employees usually prefer knowing their jobs are secure and that the company they are working for is in good health.

We can see the three areas of the cash flow statement and their results. The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing. For the sake of simplicity, we’ll say Suraya’s cash flow from operations was exactly $700 every month.

How do financial statements reflect a company’s financial health and performance over a given period?

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So the cash flow statement “corrects” line items—for instance, deducting that $1,000 from your cash on hand, since it’s not yet available to cover your costs. The primary financial statements of for-profit businesses include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar set of financial statements, though they have different names and communicate slightly different information. Different stakeholders, such as investors, creditors, management, and regulatory authorities, rely on financial statements to assess the financial health of a company. Understanding your company’s financial position is integral to its success. One tool that can help you cost drivers definition examples is financial reporting, which is an objective way to assess your company’s financial health.

Long-term liabilities, on the other hand, are due at any point after one year. Accounts within this segment are listed from top to bottom in order of their liquidity. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.

1. These three financial ratios let you do a basic analysis of your balance sheet.
2. Comprehensive income encompasses all components of income and changes in equity other than transactions with stockholders, such as net income and other comprehensive income.
3. More importantly, you’ll be able to plan ahead for more expensive months (electricity-wise) and know roughly how much money to set aside for maintenance.
4. An ability to understand the financial health of a company is one of the most vital skills for aspiring investors, entrepreneurs, and managers to develop.

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A cash flow statement outlines the cash inflows and outflows resulting from operating, investing, and financing activities during a particular period. This statement helps stakeholders assess a company’s ability to generate cash and meet its financial obligations. An income statement serves as a vital tool for investors, managers, and other stakeholders to assess a company’s financial performance and make informed decisions.

Table of Contents

This is a straightforward guide to the chart of accounts—what it is, how to use it, and why it’s so important for your company’s bookkeeping. Cash at end of period is $2,200—her starting cash amount, plus the money she earned this month. Cost of Goods Sold (COGS) is the money Erin spent in order to earn her sales revenue. For a retail business like Erin’s, that’s typically the wholesale cost of products. We don’t include the equipment line item in these assets, because selling off equipment isn’t a quick way to raise cash. You’ve added $1,000 to your retained earnings by saving more cash, even though your liabilities haven’t changed.

The purpose of a cash flow statement is to provide a detailed picture of what happened to a business’s cash during a specified duration of time, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of it. This financial statement shows a company’s total change in income, even gains and losses that have yet to be recorded in accordance with accounting rules. Investors and lenders can use this information to get a more detailed and comprehensive picture of a company’s financial health. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement equals the total equity reported on the balance sheet. Investors use this information to understand the profitability of a company and its stock.