Published on February 2nd, 2023.

In accounting, there exist four basic financial statements: the statement of financial position, the statement of earnings, the statement of changes in equity, and the statement of cash flows. Each statement is used to provide financial data that helps business owners, investors, and financial analysts to analyze a company’s financial performance.

The Statement of Financial Position

The statement of financial position, or balance sheet, reports the business activities and the financial performance of a company during a specific day. It provides an overview of a company’s assets, liabilities, and shareholder’s equity and ultimately summarizes the fundamental accounting equation, which states that Assets = Liabilities + Shareholder’s Equity.

• Assets reflect the value of resources owned by a company. Some assets include cash and cash equivalents, accounts receivable, inventory, prepaid expenses, and property, plant, and equipment.
• Liabilities reflect the amount of money a company owes to others. Some liabilities include accounts payable, notes payable, wages payable, dividends payable, and long-term debt.
• Shareholder's equity is a company’s total assets less its total liabilities. It represents the amount of money that would be returned to shareholders left from the liquidation of all assets and the repayment of all debts.

The Statement of Earnings

The statement of earnings, or income statement, reports the amount of revenue earned by a company over a period. It provides an overview of revenues, expenses, net income, and earnings per share of a company.

• Revenues includes operating revenue, non-operating revenue, and revenues earned from other activities, such as the sale of assets. Operating revenue is the revenue earned from running the business, such as the sale of a company’s products or services. Conversely, non-operating revenue is the revenue earned outside of business activities and they typically include interest earned on cash in the bank, and rental income from a property.
• Expenses mainly include the costs incurred during the process of earning revenue.
• Earnings per share (EPS) is a calculation used to display the amount of money shareholders would receive for each share of stock they own. EPS is calculated by taking the total net income and dividing it by the number of outstanding shares of a company.

The Statement of Changes in Equity

The statement of changes in equity reports the total equity of a company over time. In general, the formula for changes in shareholder’s equity is Beginning Equity + Net Income – Dividends +/– Other Comprehensive Income, however, this may vary from company to company.

• Beginning equity is the last period’s equity that carries to the start of the next period.
• Net income is the income earned by a company over a period.
• Dividends are the amount of money from a company’s profits that are paid out to shareholders.
• Comprehensive income is the period-over-period change in other comprehensive income.

The Statement of Cash Flows

The statement of cash flows reports the ability for a company to generate cash to pay its debt obligations, fund its operating expenses, and fund investments. It provides investors with information about a company’s operations, the flow of money, and ultimately a general insight into a company’s financial footing. The statement of cash flows also involves three sections that report the various activities where cash is used and they are operating activities, investing activities, and financing activities.

• Operating activities include the cash flows involved with running the business.
• Investing activities include the cash flows involved with the long-term investments of a company.
• Financing activities are sources of cash from investors or banks, and the uses of cash paid to shareholders.

The Four Financial Statements in Action

All four of the main financial statements discussed provide an evaluation of a company’s financial performance, and they all typically tie with one another. For instance, the ending balance on the statement of changes in equity is equal to the total equity on the statement of financial position. In the end, all four main financial statements are crucial since they provide insight into a company’s financial health through its financial performance, operations, and cash flows.  

Sources:

Financial Statements: List of Types and How to Read Them 

Beginners' Guide to Financial Statement