- Learn Basic Accounting in Less than 1 Hour!
- Accounting Basics
- What are Accounting Principles
- Accounting Cycle
- Accrual Accounting Basis
- Cash Basis Accounting
- Matching Principle of Accounting
- Conservatism Principle of Accounting
- Cash Accounting
- What are Accounting Policies?
- Accounting Estimates
- Mark to Market Accounting
- Cash Accounting vs Accrual Accounting
- Operating Cycle
- Fiscal Year
- Fiscal Year vs Calendar Year | Top Differences | Examples |
- Financial Reporting
- Financial Statements
- Interim Financial Statements
- Consolidated Financial Statement
- Audited Financial Statements
- Accounting Scandals
- Quality of Earnings
- IFRS vs US GAAP
- IFRS vs Indian GAAP
- Accounting for Fair Value Hedges
- Debit vs Credit in Accounting
- Double Entry Accounting System
- Journal in Accounting
- Ledger in Accounting
- Journal vs Ledger
- What is Trial Balance ? | Examples | Steps | Prepare | Errors
- Reconciliation of Books | Types, Best Practices | Useful Tips
- Petty Cash | Meaning | Template | Accounting | Example
- Debit Note | Debit Notes Accounting & its Top Characteristics
- Credit Note
- Debit Note vs Credit Note | Top 7 Differences (Infographics)
- Balance Sheet
- Balance Sheet
- Accounting Equation
- Assets vs Liabilities | Top 9 Differences (with Infographics)
- Trial Balance vs Balance Sheet | Top 10 Differences You Must Know!
- Balance Sheet vs Consolidated Balance Sheet
- Bank vs Company Balance Sheet
- Commitments and Contingencies
- Management Discussion & Analysis
- Revenue Reserve vs Capital Reserve | Top 7 Differences
- Revenue Reserve
- Capital Reserve
- Capital Receipts vs Revenue Receipts | Top 8 Differences
- Capital Lease vs Operating Lease | Top Differences You Must Know!
- Debt vs Equity Financing | Advantages | Disadvantages | Example
- Internal vs External Financing | Top 7 Differences (Infographics)
- Available for Sale for securities
- Held to Maturity to securities
- Cash and Cash Equivalents | Examples, List & Top Differences
- Cash Equivalents
- Restricted Cash
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- Current Assets
- FIFO vs LIFO
- First In First Out (FIFO)
- Last in First Out (LIFO)
- LIFO Reserve
- Non-Current Assets
- Accounts Receivables? | Definition, Accounting Examples
- Accounts Receivables Factoring
- Allowance for Doubtful Accounts
- Accrued Revenue
- Liquid Assets
- Quick Assets
- Marketable Securities on the Balance Sheet | Top Examples
- Trading Securities in Balance Sheet
- Prepaid Expenses
- Tangible vs Intangible Assets
- Net Tangible Assets | Calculate Net Tangible Assets Per Share
- Tangible Assets
- Capital Expenditure (Capex)
- Salvage Value
- Residual Value
- Fixed Capital vs Working Capital | Top 8 Differences (Infographics)
- Impariment of Assets
- Negative Goodwill
- Accounts Payable | Days Payable Outstanding | Formula |
- Current Liabilities | List of Current Liabilities on Balance Sheet
- Accrued Liabilities
- Notes Payable
- Revolving Credit Facilities
- Bonds Payable Accounting
- Bad Debt Reserve Allowance
- Deferred Expenses
- Unearned Revenue (Sales)
- Deferred Revenue (Income)
- Current Portion of Long-Term Debt (CPLTD) | Balance Sheet
- Long-Term Debt in Balance Sheet
- Financial Liabilities | Definition, Types, Ratios, Examples
- Long-Term Liabilities
- Accounts Receivable vs Accounts Payable
- Minority Interest
- Accounting for Convertibles
- Accounting for Derivatives
- Financial Lease vs Operating Lease
- Off balance Sheet Financing
- Finance vs Lease
- Shareholders Equity
- Shareholders Equity Statement
- Negative Shareholders Equity
- Par Value of Stock
- Share Capital
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Owners Equity
- Preferred Shares
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Stock Dividend
- Cash Dividend
- Preferred Dividends
- Homemade Dividends
- Ex dividend date
- Date of Record of dividends
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Cost of Goods Sold
- Direct Costs
- Indirect Costs
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Amortization of Intangible Assets
- Unrealized Gains (Losses)
- Non Cash Expense
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Double Taxation
- Net Loss
- Net Operating Loss (NOL)
- Tax Shield
- Sundry Expenses
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Cost vs Expense
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed cost vs Variable cost
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Cash Flow Statement
- Cash flow from Operations | Formula, Calculations & Examples
- Cash Flow from Investing Activities (Formula & Top Examples)
- Cash Flow From Financing Activities | Formula & Calculations
- Cash Flow Analysis
- Fund Flow Statement
- Direct vs Indirect Cash Flow Methods
- Cash flow vs Net Income | Key Differences & Top Examples
- Cash Flow vs Fund Flow | Top 8 Differences (with Infographics)
- Accounting Careers
- Accounting Interview Questions
- Financial Accounting Careers
- Top Accounting Firms
- Big Four Accounting Firms
- Forensic Accounting
- Cost Accounting
- Financial Accounting
- Accounting vs Engineering
- Finance vs Accounting
- Bookkeeping vs Accounting
- Accounting vs Auditing
- Bookkeepers vs Accountants
- Accounting vs Financial Management
- Cost Accounting vs Financial Accounting
- Cost Accounting vs Management Accounting
- Financial Accounting vs Management Accounting
- Public vs Private Accounting
- Accounting vs CPA
- Controller vs Comptroller
- Accounting Firms in Australia
- Accounting Firms in Canada
- Top Accounting Firms in US
- Accounting Books
What are Financial Statements?
Every investor, every trader, and every finance student or professional needs to know what financial statements are.
Financial statements are the accurate picture of the financial affairs of a company in a given year. The financial statements are prepared by using the financial data collected by the accountants or the financial analysts of the company. These financial statements need to be reported by following prescribed and standardized accounting principles so that the reporting has harmony at all levels.
4 Types of Financial Statements
There are four types of financial statements. The first one is the balances sheet that equates assets and liabilities. The second one is the income statement that takes into account the revenue and the expenses and matches them. The third one is the cash flow statement that looks at the cash transactions and non-cash transactions and finds out about the cash inflow and cash outflow. The last one that’s not usually talked about is the explanatory note/s that covers all the minute details about the inventory method used or how the company has calculated its owner’s equity etc.
Financial Statements Examples
Now, let’s look at each of the financial statements examples with a practical example.
#1 – Balance Sheet
The balance sheet is a financial statement 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 –
source: Colgate SEC Filings
The above is just a snapshot of how the balance sheet works.
- Under the current assets, you can consider cash, accounts receivable, rent prepaid etc. Under the non-current assets, we can put equipment, plant, building etc.
- The idea is to follow a sequence from more liquid to less liquid.
- At the same time, on the other hand, you can consider notes payable, accounts payable, income tax payable, outstanding salaries etc. As a long-term/non-current liability, you can consider long-term debt.
The balance sheet sometimes gets quite complex and the accountants need to make sure that every record is properly reported so that the total assets 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.
source: Colgate SEC Filings
- Well, it starts with the gross sales or revenue. Then we deduct any sales return or sales discount from the gross sales to get the net sales. This net sale is what we use for ratio analysis.
- From net sales, we deduct the costs of goods sold and we get the gross profit.
- From gross profit, we deduct the operating expenses like the expenses required for daily administrative expenses. By deducting the operating expenses, we get the EBIT, meaning the earnings before interest and taxes.
- From EBIT, we deduct the interest charges paid or add interest received (if any) and we get EBT, meaning earnings before taxes.
- From EBT, we deduct the income taxes for the period and we get the Net Income, meaning profit after tax.
#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 flow statement. These statements are cash flow from the operating activities, cash flow from investing activities, and cash flow from finance activities.
source: Colgate SEC Filings
- Cash Flow from Operations is the cash generated from the core operations of the business.
- Cash Flow from Investing Activities relates to the cash inflows and outflows related to investment in the company like buying of property, plant, and equipment or other investments.
- Cash Flow from Financing Activities relates to the cash inflows or outflows related to debt or equity of the company. It includes raising of debt or equity, loan repayments, buyback of shares and more.
#4 – Statement of Changes in Shareholders Equity
Statement of Changes in Shareholders Equity is a financial statement that provides the summary of changes in the shareholders equity in a given period.
source: Colgate SEC Filings
- Common Stock is the first and most important component of shareholders equity. Common stockholders are the owners of the company.
- Additional Paid in Capital means when the company receives a premium on the shares.
- Retained earnings or losses are accumulated from the previous period. In simple terms, retained earnings are the amount company keeps after paying the dividend from net income.
- Treasury shares is the sum total of all the common shares that have been purchased back by the company.
- Accumulated Other comprehensive income contains unrealized gains/losses that do not flow through the income statement.
Financial Statements provide a financial snapshot of the company’s performance over the years.
- Balance Sheet provides the details of company’s sources and uses of funds.
- Income Statement provides an understanding of the revenues and the expesnes of the business.
- Cash flows, on the other hand, tracks the movement of cash in the business.
- Statement of Changes in Shareholders equity provides the summary of shareholders accounts for a given period.
Besides these four types of financial statements discussed above, it is also important that you look at the explanatory notes to the accounts. These notes provide a detailed explanation of the line items.
This has been a guide to what are financial statements. Here we discuss the 4 types of financial statements – balance sheeet, income statement, cash flows and statement of changes in shareholders equity along with practical examples. You may learn more about basic accounting from the following articles –