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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Source: Financial Statements (wallstreetmojo.com)

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 works.

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 statement 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.

Income

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 FlowStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.read 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 Equity 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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