What are financial statements? (with types and examples)

By Indeed Editorial Team

Updated 22 June 2022 | Published 3 January 2022

Updated 22 June 2022

Published 3 January 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Financial statements refer to crucial reports summarising a company's financial results, its financial position and cash flow. They provide essential accounting information that helps businesses track financial activities and attract potential investors. There are different types, and each of them has a way of how to calculate and interpret them. In this article, we discuss what financial statements are and their importance, the four financial statements types and give their examples.

What are financial statements?

To learn what financial statements are, it's necessary to understand the definition of financial statements and their importance and the various financial statements you can use in your business. Financial statements refer to written records presented in a structured manner to convey the company's financial activities and performance. These reports show the company's source of revenue, assets and liabilities, how it spends money and cash flow management. Often, government agencies, accountants and other companies audit financial statements to verify their accuracy for various purposes, such as taxation, financing and investing.

It's essential to have reliable, accurate, comparable and understandable financial statements since they interrelate and influence economic decisions taken by various stakeholders. These positively impact the continuity of the company's operation through decision-making at the managerial level and provide insight into the company's viability for investors and lending institutions. The aims of financial statements: included to:

  • determine the company's ability to generate cash, the source of its finances and how it's spent

  • examine details provided on specific business transactions

  • determine if the company can repay its debts without affecting its operations

  • identify and track financial results for any profitability concerns

  • establish the condition of the company by deriving financial ratios

  • help the management make informed decisions as it forms

Types of financial statements

The four types of financial statements are:

1. Balance sheets

Balance sheets show the company's financial position with detailed information on its assets, liabilities and shareholders' equity in a specific period, often at the end of a fiscal year. From balance sheets, you can know what your company owns and owes at the stated time. Asset listing follows the order of liquidity, liabilities follow the order of their due dates and shareholders' equity shows money shareholders invested in the company after adding or deducting its earnings or losses from inception.

The formula that the balance sheet follows is:

Assets = Liabilities + Shareholders' equity

Assets on the balance sheet appear leftwards while posting for liabilities and stockholders' equity on the right-hand side. Also, the balance sheet lists items from top to bottom, beginning with assets, then liabilities and shareholders' equity. Follow the list below to know the items that appear on the balance sheet:

  • Assets: These items have value and show what the company owns, since it can sell or use them to produce products and services. Assets owned by a company include inventory, property, equipment, cash and cash equivalents and investments.

  • Liabilities: Liabilities reflect what the company owes others. These include wages payable, rent, dividends payable, long-term and short-term debts and government taxes.

  • Shareholders' equity: Its also referred to as capital, which remains after subtracting its total liabilities from its total assets. Shareholders' equity includes kept earnings and represents the earnings that shareholders may receive if liquidation occurs or if the company pays out dividends.

Related: What is accounts receivable and why do businesses need it?

Example of a balance sheet

Figures for JTech2 Company as of January 2020:

Total assets = £135,000

Total liabilities = £55,000

Stockholders' equity = £80,000

Therefore, total liabilities and shareholders' equities = £135,000

JTech2 Company
Balance Sheet (in millions of pounds)
January 31, 2021

Assets
Liabilities and Equity
Current Assets
Current Liabilities25,000Cash (in-hand and bank)20,000Long-term Liabilities30,000Debtors15,000Total Liabilities55,000Inventory10,000

Total Current Assets45,000Shareholders' Equity80,000Fixed Assets(Property)55,000

Other Assets(Long-term) 35,000

Total Assets135,000Total Liabilities and Equity135,000### 2. Income statements

Income statements, or profit-and-loss statements, show the company's income, expenses, earnings per share and profits over a specified period. Income statements aim to show the company's financial performance during a specific period with details of profitability and the effects of business activities. Calculating net income involves subtracting total expenses and costs of business operation from total revenue or sales. You can determine how much your company gained or lost and the shareholders' amount in net earnings if distributed during the stated period.

The revenue in income statements includes operating revenue, which refers to revenue earned from selling products and services and non-operating revenue, which refers to revenue made from non-core business activities. Examples of types of revenue include rental and advertising income earned from the company's property, interest on cash in the bank and profits from the sale of non-current assets. Expenses incurred in earning income include the cost of goods sold, salaries, sales commission, administrative expenses, depreciation and transport and electricity costs. Also, expenses include interest paid on loans, income tax and losses incurred from selling assets.

Related: Gross pay vs. net pay: definitions and examples

Income statement example

Figures for JTech2 Company to determine the net income:

Total revenues = £350,000

Total costs = £280,000

Income taxes = £19,000

Revenue – expenses= Net income; therefore, net income = £51,000

JTech2 Company
Income Statement (in millions of pounds)

Sales and Other Operating Revenue260,000Income from Equity Affiliates60,000Other Income30,000Total Revenue350,000Cost and Other DeductionsPurchases199,000Manufacturing Expenses30,500Interest Expenses10,500Depreciation25,000Other Taxes15,000Total Cost and Other Deductions280,000Income (Before Taxes)70,000Income Taxes19,000Net Income51,000### 3. Cash flow statements

A cash flow statement displays how cash and cash equivalents move in and out of your company in a stated period. It shows the short-term viability of the company in meeting its obligations in paying debts and funding investments and operating expenses. Cash flow statements generate data from the profit-and-loss statements, balance sheets and income statements to show whether there is a net increase or reduction in cash. You can assess the cash flow statement to find out whether the company generated cash, why there are differences in reported and related cash flows and how significant transactions affect the company's finances.

The cash flow statement provides insight into the company's liquidity and solvency, operating performance compared with other companies and future cash flow changes. When you have more cash coming into the company than that which is going out, the cash flow becomes positive. Also, when less money is coming in and more going out, the cash flow becomes negative. Below are three sections that show cash flow for various company activities:

Operating activities

The cash flow report in this section shows the movement of cash in this section arising from net gains and losses. You can achieve this by reconciling the actual cash from operating activities, received or used and the net income shown on the income statement. Operating activities include changes in depreciation, amortisation, dividends, cash receipts for clients, profits or losses. These may be from the sale of long-term assets, deferred tax, interest and income tax payments, salaries and accounts receivables and payables.

Investing activities

This section shows how cash flows result from investing activities. These activities may include increases and decreases in non-current assets and return on investments. It also includes cash inflows and outflows from mergers, dividends, investment securities, acquisitions and the sale of assets.

Financing activities

This section shows financing activities related to cash flows. These may include cash borrowed from banks, equity and debt issuance, stock repurchases, debt repayment and dividends paid. In addition, loans borrowed to finance activities are listed in this section.

Example of a cash flow statement

Figures for JTech2 Company to determine cash and cash equivalents:

Operating activities = £40,000

Investing activities = (£19,000)

Financing activities = (£11,000)

JTech2 Company
Cash Flow Statement (in millions of pounds)

Operating ActivitiesNet income50,000Depreciation12,000Changes in Operational Working Capital2,000All Other Items-(Net)(24,000)Operating Activities Net Cash40,000Investing ActivitiesAdditional Assets(20,500)Sales and Returns of Investment6,000Additional Investments(9,500)Other Investment Activities5,000Investing Activities Net Cash(19,000)Financing ActivitiesShort-term and long-term debt(4,000)Cash Dividends(8,600)Common Stock Acquisition1,600Net Cash - Financing Activities(11,000)Cash and Cash Equivalents(increase)10,000Cash and Cash Equivalents (at the opening of the Period)7,500Cash and Cash Equivalents (at the end of Period)17,500Related: What is basic accounting (principles, jobs and education)

4. Statement of shareholders' equity

The statement of shareholders' equity derives data from the balance sheet to provide more information on the value of shareholders' equity changes during a specific period. You can determine shareholder equity by deducting the total liabilities from total assets. Also, you can get this by adding share capital, retained earnings and fewer treasury shares. This helps you to know the company's value after paying out investors and stockholders. Positive shareholder equity implies assets can cover its liabilities, whereas negative shareholders' equity causes concern since the liabilities exceed the assets. The report includes retained earnings, outstanding shares and paid-in capital additions.

Please note that none of the companies mentioned in this article are affiliated with Indeed.

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