Four Types of Financial Statements
The Four Types of Financial Statements
ACC/561 Version 4
December 22, 2012
Much success in today’s business world is tied in with numbers in the form of accounting and financial statements. Being able to understand and properly read these statements is a critical component in truly knowing a business and properly assessing its overall performance. In the accounting world there are four main financial statements that are universally understood and prepared for most publically traded companies and many small and medium sized businesses: the income statement, the balance sheet, the statement of cash flows, and the statement of retained earnings (sometimes referred to as shareholders’ equity). A fundamental ability to properly interpret the information these statements contain allows internal and external users to make a wide array of decisions affecting company operations and decisions on whether or not to invest. Users of financial statements will look to the income statement to learn assess a company’s performance over a set period of time, often a month or a year. This statement depicts the company’s revenues and expenses with the difference reflecting the net income (or loss) resulting from the firm’s business activities. The revenue will be broken down by the category from which it derived with expenses broken down in a similar fashion. Those most interested in a company’s income include shareholders, potential investors, banks (for the purpose of assessing past performance and potential loan risk), creditors, and executives charged with ensuring profitability for the business. The complexity of an income statement will vary based on that of the company from whence it derives and the depth of its business activities (www.accountingcoach.com). In larger corporations an accrual basis of accounting is commonly used where revenues are recorded when the money is actually earned, as opposed to cash being received which would count simply as a
ACC/561 Version 4
December 22, 2012
Much success in today’s business world is tied in with numbers in the form of accounting and financial statements. Being able to understand and properly read these statements is a critical component in truly knowing a business and properly assessing its overall performance. In the accounting world there are four main financial statements that are universally understood and prepared for most publically traded companies and many small and medium sized businesses: the income statement, the balance sheet, the statement of cash flows, and the statement of retained earnings (sometimes referred to as shareholders’ equity). A fundamental ability to properly interpret the information these statements contain allows internal and external users to make a wide array of decisions affecting company operations and decisions on whether or not to invest. Users of financial statements will look to the income statement to learn assess a company’s performance over a set period of time, often a month or a year. This statement depicts the company’s revenues and expenses with the difference reflecting the net income (or loss) resulting from the firm’s business activities. The revenue will be broken down by the category from which it derived with expenses broken down in a similar fashion. Those most interested in a company’s income include shareholders, potential investors, banks (for the purpose of assessing past performance and potential loan risk), creditors, and executives charged with ensuring profitability for the business. The complexity of an income statement will vary based on that of the company from whence it derives and the depth of its business activities (www.accountingcoach.com). In larger corporations an accrual basis of accounting is commonly used where revenues are recorded when the money is actually earned, as opposed to cash being received which would count simply as a