Financial Statements

Financial Statements Definition

Financial statements are written reports created by a company’s management to summarize the financial condition of the business over a certain time period (quarter, six monthly or yearly). These statements, which comprise the balance sheet, income statement, cash flow statement, and statement of shareholders equity, must be prepared in accordance with specified and standardized accounting standards to ensure that reporting is consistent at all levels.

Examples of Financial Statements

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Key Takeaways

Basics of Financial Statement

Now, let’s look at the basics of financial statements along with a practical example.

#1 – Balance Sheet

The balance sheet is a financial statement that provides a snapshot of the assets, the liabilities, and the shareholder’s equity. Many companies use the shareholders’ equity as a separate financial statement. But usually, it comes with the balance sheet.

The equation that you need to remember when you prepare a balance sheet is this –

Assets = Liabilities + Shareholders Equity

Let’s look at a balance sheet so that we can understand how it works –

Financial Statements - Balance Sheet

source: Colgate SEC Filings

The above is just a snapshot of how the balance sheet worksHow The Balance Sheet WorksA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the more.

The balance sheet sometimes gets quite complex, and the accountants need to make sure that every record is properly reported so that the total assetsTotal AssetsTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more always equal total liabilities plus shareholders’ equity.

#2 – Income Statement

The income statementThe Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user more is the next financial statement everyone should look at. It looks quite different than the balance sheet. In the income statement, it’s about the revenue and the expenses.


source: Colgate SEC Filings

#3 – Cash Flow Statement

Cash Flow Statement is the third most important statement every investor should look at.

There are three separate statements of a cash flowStatements Of A Cash FlowA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a more statement. These statements are cash flow from the operating activities, cash flow from investing activities, and cash flow from finance activities.

Cash Flow

source: Colgate SEC Filings

#4 – Statement of Changes in Shareholders Equity

Statement of Changes in Shareholders EquityShareholders EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting more is a financial statement that provides a summary of changes in the shareholder’s equity in a given period.

Changes in Shareholders Equity

source: Colgate SEC Filings

Financial Statements Video


This has been a guide to what are financial statements and its definition. Here we discuss the basic overview of financial statements – balance sheet, income statement, cash flows, and statement of changes in shareholders equity. You may learn more about basic accounting from the following articles –

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