Types of Financial Statements

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Are the Types of Financial Statements?

The types of financial statements refer to the different kinds of records in a written format that depict the transactions a company carries out over a period, thereby helping the management and investors of the firm assess its performance for better and more effective decision-making.

Financial Statements Types

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Though there are multiple types of financial statements that an organization or entity has, there are three of them that are necessarily maintained by every business firm. These include the balance sheet, income statement, and cash flow statements. These written records facilitate analyzing and comparing an organization’s financial position and performance.

Types of Financial Statements Explained

The types of financial statements maintained by businesses and entities are many with the transactions recorded in different forms. These enable information readers to understand how fruitful the performance of a firm has been over a period. Given the revelations the figures make, the management determines strategies to improve their functioning and implement better strategies to become better or at least work on keeping up the same pace if it’s yielding good results.

The financial statements, in addition, also allow investors to have a look at the performance of the businesses and analyze their future prospects. If the performance is observed to be on the right track, the investors trust the company, or else they look for other businesses to make investments. The most common types of these statements that firms necessarily use include the following:

  1. Balance Sheet: A balance sheet tells information readers where the company stands in terms of assets and liabilities.
  2. Income statement: With an income statement, one comes to know about the performance of every single income stream of a company.
  3. Cash flow statements: As the name suggests, cash flow statements are meant to mention the actual cash flow so that the real scenario is clear.

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Purpose

The above financial statements are prepared in various forms to serve certain objectives. Some of these purposes include:

  • They reflect the figures, indication assets, liabilities, revenue, expenses, and cash flows derived from different business activities.
  • The income statement tends to enable businesses to analyze latest trends with respect to the business operations being carried out.
  • The balance sheet is prepared to tell information readers about the status of any business as of the mentioned date on the statement. This indicates the current funding, liquidity, and debt position of a firm.
  • The cash flow statement, on the other hand, is maintained to identify different means of payments received and disbursed for various activities.

Examples

The three types of statements have already been introduced above. However, they have been explained in detail with examples below. Let us have a look at them:

#1 Balance Sheet

It is one of the type of financial statements considered as a final output for all financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more as the net profit from the income statement and ending cash balance from cash flow statements are inputs for creating a balance sheet. It shows all the assets and liabilities & shareholders equity of the company. According to the balance sheet equationBalance Sheet EquationBalance Sheet Formula is a fundamental accounting equation which mentions that, for a business, the sum of its owner’s equity & the total liabilities equal to its total assets, i.e., Assets = Equity + Liabilitiesread more:

Assets = Liabilities + Shareholder’s Equity

Example of Balance Sheet

Types of Financial Statements - Balance Sheet Format

In balance sheet on the side of Assets in AccountingAssets In AccountingAssets in accounting refer to the organization's resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company's worth and are recorded in the balance sheet.read more, we have the following items:

On the Liabilities side of the Balance sheet, we have the following items:

  • Accounts Payables: The total claims that others have on our company as we purchase their goods and services on credit.
  • Unearned Revenue: When a customer pays in advance, but the product is not yet delivered to him when we say that this revenue is yet to be earned, and hence it becomes a liability on our balance sheet.
  • Current Portion of Long Term Debt: It shows that part of the debt we need to retire this year itself.
  • Long Term Debt: It shows all the long term borrowings of the company, which we will repay over a long course of time as and when they come due.

On the Equity side of the Balance sheet, we have the following items:

#2 Income Statement

The income statement is one of the types of financial statement that stores all the company’s income and expenditures. As the business does its day-to-day business, it keeps on incurring daily expenses and earning income from its business activities. All these items are recorded in this statement. We earn our income by selling our products and providing services to the client. There can be a variety of expenses that the company can incur, some of which are mentioned below:

  • Salaries
  • Rent
  • Telephone & Internet
  • Water & Electricity
  • Taxes
  • Insurance
  • Advertising & Marketing Cost
  • Fuel
  • Stationary
  • Interest Paid and Other Bank Charges

Above is the list of expenses, and this list is not conclusive.

Example of Income Statement

Below is a typical example of the Income statementExample Of The Income StatementThe income statement summarizes all the revenues and expenses to ascertain the profit or loss of the company. The example includes an income statement prepared every half-yearly to present the different revenues and expenses to show the company's financial picture.read more:

Income Statement Format - US companies
We start by reporting our overall sales from the business. Then we subtract the cost of producing those goods and services to get the business’s gross margin. Now we subtract all the business-related expenses (like those mentioned above) to calculate Operating earnings (EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors.read more). Then we subtract depreciation and amortization (D&A) to calculate final operating earnings (EBITEBITEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more). Finally, from EBIT, we will reduce Interest to get Earnings before tax (EBT) / Profit before taxProfit Before TaxPretax income is a company's net earnings calculated after deducting all the expenses, including cash expenses like salary expense, interest expense, and non-cash expenses like depreciation and other charges from the total revenue generated before deducting the income tax expense.read more (PBT), and then we will deduct taxes to calculate the final figure of Profit after tax Profit After Tax Profit After Tax is the revenue left after deducting the business expenses and tax liabilities. This profit is reflected in the Profit & Loss statement of the business.read more(PAT).

#3 Cash Flow Statement

This statement is one of the types of financial statements that records all-cash transactions that have happened over the period in the business. There are some ways by which the books of account can be window dressed to look better than what they should be, but manipulating cash is very difficult. Hence, a cash flow statement is considered a more reliable source of information. A company primarily generates cash from 3 areas:

Example of Cash Flow StatementChevron Cash Flow from Operations

Within Cash Flows from OperationsCash Flows From OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more, we start from Net Income and then reduce all the non-cash expensesNon-cash ExpensesNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation.read more like depreciation and add back all the non-cash gains in Net Income. Then, we add back all the decrease in current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more as they would have reduced our asset balance initially, and hence we should add them. Similarly, we need to subtract all increases in the current asset as an investment in the current asset would have reduced our asset pool, so we should add it back. We will do just the opposite on the liabilities side to back-calculate the cash flow from our business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more.

colgate-cash-flow-from-investments

Then within cash Flows from Investing Activities, we will start by adding all the sales concerning the plant, machinery, and equipment as they have increased our asset balance and subtract all the purchases that we have made of these long-term capital assets. This will help us in calculating cash flows originating from investing activities.

amazon-cash-flow-from-financing

Then we will move on to the final part of the cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more, i.e., cash Flows from Financing Activities. Here we will add all the items that have infused cash in our capital structure, like the sale of debenture or sale of equity, and subtract all the items that have brought down our cash balance from this aspect, like a redemption of bonds, etc.

The sum of all these 3 line items will give us the cash balance increase/decrease during the year. We will add it to the beginning cash balance to get the ending figure of cash and cash equivalents.

Importance

Each of the types of financial statements tracks the inflow and outflow of resources to and from the business firms. As already discussed, these statements let the management learn about the assets it has against its liabilities and obligations, revenue generated against cost incurred, and cash inflow against the cash outflows.

If the number of assets exceeds the number of liabilities to handle, the revenue figures are more than the expenditure made, and the cash inflows are higher than the cash flowing out of the business, the organizations indicate progressive growth. On the other hand, if the scenario is the opposite, the companies indicate moving on an inappropriate track, hence reflecting room for improvement in strategies.

Apart from how these help the management of the firms to take appropriate decisions, they also let investors assess and analyze the figures indicated in these written records, and compare the same with the figures of other companies. As a result, they better know where to invest in.

Limitations

The financial statements, if studied individually, might not yield reliable results so far as helping in decision-making is considered. While one statement might indicate the good performance of a company, another might show a different result. Thus, studying different types of financial statements and analyzing each of them to come to a reliable and proper conclusion is a must.

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