Financial Statements Types
Accountancy is the language used by businesses to interpret their performance and there are primarily three Types of Financial Statements which are used by these businesses to communicate their current growth and accumulated fortune. These three types of financial statements are mentioned below:
Now each statement has its own purpose and usage in business. Let’s take a look at what these statements store in them and what role do they play in reporting the performance of the business.
Top 3 Types of Financial Statements
The three main types of financial statements are:
#1 – Balance Sheet
It is one of the types of the financial statements considered as a final output for all financial statements as the net profit from the income statement and ending cash balance from cash flow statement are inputs for creating a balance sheet. It shows all the assets and liabilities & shareholder’s equity of the company. According to the balance sheet equation:
Assets = Liabilities + Shareholder’s Equity
Example of Balance Sheet
Below is a typical example of balance sheet:
On the Asset side of the Balance Sheet, we have the following items:
- Cash and Cash Equivalents: The amount of money that the company holds as cash and bank balance.
- Marketable Securities: The Company can also park investment in mutual fund schemes, debentures, public stock/private investment in other companies in order to earn for short term.
- Account Receivables: It is the claim of the company against all the credit based sales done by it to the clients.
- Inventory: It is the main products and services which the company want to sell.
- Plant & Equipment: It includes all the equipment’s which the company uses to build its products.
On the Liabilities side of the Balance sheet, we have the following items:
- Accounts Payables: It is 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 which we need to retire this year itself.
- Long Term Debt: It shows all the long terms 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:
- Paid Up Capital: It shows the original capital which was invested by the owners of the business and also the follows on increase in capital if more shares were issued.
- Retained Earnings: It provides an insight into the money which the business has made over the course of time but has kept it with itself rather than sharing it with investors by way of dividend.
#2 – Income Statement
The income statement is one of the types of financial statement which stores all the income and expenditures of the company. As the business does its day to day business, it keeps on incurring daily expenses and earning income from its business activities and all these items are recorded in this statement. We earn our income by way of selling our products and providing services to the client. There can be a variety of expenses which the company can incur, some of which are mentioned below:
- Telephone & Internet
- Water & Electricity
- Advertising & Marketing Cost
- Interest Paid and Other Bank Charges
Above is the list of expenses and this list is not conclusive in nature.
Example of Income Statement
Below is a typical example of Income statement:
We start by reporting our overall sales from the business then we subtract the cost of producing those goods and services to get the gross margin of the business. Now we subtract all the business-related expenses (like the ones mentioned above) in order to calculate Operating earnings (EBITDA) and then we subtract depreciation and amortization (D&A) to calculate final operating earnings (EBIT). From EBIT, we will reduce Interest to get Earnings before tax (EBT) / Profit before tax (PBT) and then we will deduct taxes to calculate the final figure of Profit after tax (PAT).
#2 – Cash Flow Statement
This statement is one of the types of financial statements which 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 dressed to look better then what they should be in real but manipulating cash is very difficult and hence cash flow statement is considered as a more reliable source of information about the company. A company primarily generates cash from 3 areas:
- From its operations: which is covered in cash flow from operating activities.
- From the purchase and sale of its assets: which is covered in cash flow from investing activities.
- From raising funds via debt and equity: which is covered in cash flow from financing activities.
Example of Cash Flow Statement
Within Cash Flows from Operations, we start from Net Income and then reduce all the non-cash expenses like depreciation and add back all the non-cash gains in Net Income. Then, we add back all the decrease in current assets as they would have reduced our asset balance initially and hence we should add them and similarly, we need to subtract all increase in the current asset as an investment in the current asset would have reduced our asset pool and hence we should add it back. We will do just the opposite for liabilities side in order to back-calculate the cash flow from our business operations.
Then within Cash Flows from Investing Activities, we will start with adding all the sales with respect to plant, machinery, and equipment as they have increased our asset balance and subtract all the purchase that we have made of these long term capital assets. This will help us in calculating cash flows originating from investing activities.
Then we will move on to the final part of the cash flow statement i.e. Cash Flows from Financing Activities where we will add all the items that have infused cash in our capital structure like sale of debenture or sale of equity and subtract all the items that have brought down our cash balance from this aspect like redemption of bonds etc.
The sum of all these 3 line items will give us the cash balance increase/decrease during the year. Now we will add it to the beginning cash balance to get the ending figure of cash and cash equivalents.
This has been a guide to Financial Statement Types. Here we discuss the top three financial statements i.e 1) Income Statement 2) Cash Flow Statement and the Balance Sheet. You may learn more about Accounting from the following articles –
- Important documents involved in AP Cycle
- List of Most Common Examples of Marketable Securities
- Examples of Accounts Payable | Explanation
- Components of Financial Statements
- Users of Financial Statements
- What is the Financial Statement Audit?
- What is Interim Financial Statements?
- What is Pro Forma Financial Statements?