ACC - Financial Statements [LESSON]

Financial Statements

In this lesson, we will learn about the three main types of business financial statements as well as how these statements can be used to make informed business decisions.

Knowledge Point

So far in this module, we have learned about the various sources of income for a business as well as the categories used to differentiate what a business owns and what a business owes to others. In this lesson, we will discuss how a business organizes this information and how this information is used by owners, investors, creditors, and employees of a business.

Financial statements are documents that provide an overview of a company’s financial performance and position. These documents are used by investors, creditors, and other stakeholders to assess the financial health of the business and to make informed decisions. The three main types of financial statements are the balance sheet, income statement, and cash flow statement.

The Balance Sheet

The balance sheet is a snapshot of a company’s financial position at a specific point in time, usually at the end of a reporting period. The balance sheet is based on the accounting equation: Assets = Liabilities + Owner’s Equity. The balance sheet provides a summary of a company’s financial position and helps investors understand how the company is funded and structured.

Review the image below to learn more about how to read a balance sheet.

We will discuss current and non-current assets and liabilities in the next lesson, but for now, know that current assets are easily converted to cash whereas non-current assets might take more time. Likewise, current liabilities are debts that are due within one year whereas non-current liabilities are not due within one year.

The Income Statement

The income statement, also known as the profit and loss statement, reports a company’s revenues, expenses, and net income over a specific period of time (usually a year or a quarter). The income statement is based on the following equation: Net Income = (Revenue + Gains) – (Expenses + Losses). The income statement helps assess a company’s profitability and performance.

Review the image below to learn more about how to read an Income Statement.

The Cash Flow Statement

The cash flow statement is a financial statement that provides a summary of the movement of cash and cash equivalents in and out of a company. It is a tool that can be used for analyzing a company’s cash management and its ability to generate cash to meet its financial obligations. The cash flow statement complements the balance sheet and the income statement, forming the three main financial statements used by investors and creditors to assess a company’s financial health.

Now that you have a basic understanding of the three main types of financial statements, let’s compare the three types to help you build a better understanding. Take a closer look at each report below.

Financial Statements | Self-Assessment

Test your understanding of business financial statements by participating in the activity below. Read each business scenario and then choose the appropriate financial statement.

Reflection

Balance sheets, income statements, and cash flow statements are essential financial statements that provide valuable insights into a company’s financial position. By analyzing these financial statements together, stakeholders can gain a comprehensive understanding of a company’s financial health and make informed business decisions.

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