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.
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.
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.
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.
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.
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