{"id":137252,"date":"2023-12-11T16:56:04","date_gmt":"2023-12-11T16:56:04","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&#038;p=137252"},"modified":"2023-12-12T05:44:58","modified_gmt":"2023-12-12T05:44:58","slug":"financial-statement","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/financial-statement","title":{"rendered":"Financial Statement"},"content":{"rendered":"<h2><span id=\"what_is_a_financial_statement\">What is a Financial Statement?<\/span><\/h2>\n<p>Financial statements are written reports created by a company&#8217;s management by using their <a href=\"https:\/\/www.techopedia.com\/accounting\/best-accounting-software\">accounting software<\/a> to summarize the business\u2019s financial condition over a certain period (quarter, semester, or year).<\/p>\n<p>They provide crucial information to investors and other stakeholders who can learn about the current financial status of a company before they make investments or other strategic decisions.<\/p>\n<p>Statements can be compared with other reports from previous years to identify trends and major changes in the company\u2019s financial performance or with those of other companies to establish valuable comparisons.<\/p>\n<h2><span id=\"how_does_a_financial_statement_work\">How Does a Financial Statement Work?<\/span><\/h2>\n<p>Financial statements are made regularly to suit the different needs of the management and stakeholders who rely on this info.<\/p>\n<p>Even though companies can summarize their financial performance in a single report, it is difficult for the stakeholders to depend on such a narrow overview to make major decisions.<\/p>\n<p>Therefore, more than one statement is available to ensure that readers get a clear picture of the financial status and performance of the business.<\/p>\n<p>Companies prepare a minimum of <strong>four financial statements<\/strong>, including a balance sheet, income statement, cash flow statement, and statement of changes in equity.<\/p>\n<p>By using financial ratios and other calculations, stakeholders can analyze a company&#8217;s performance and financial health either to rate it as a potentially attractive investment (investors), take action regarding their portfolio exposure to the business (portfolio managers and analysts), or make strategic changes that can have a positive impact in its top and bottom line in the future (managers).<\/p>\n<p>Businesses that generate robust cash flows are typically perceived as highly valuable as they can generate returns to shareholders that can be distributed in the form of dividends, or that will cause an increase in the company&#8217;s stock price.<\/p>\n<p>Moreover, positive cash flows can be used to reinvest in the business, pay off its debts, and finance intense <a href=\"https:\/\/www.techopedia.com\/definition\/research-and-development-rd\">research and development<\/a> (R&amp;D) initiatives.<\/p>\n<h2><span id=\"how_are_financial_statements_calculated\">How are Financial Statements Calculated?<\/span><\/h2>\n<p>The preparation of financial statements requires that different transactions are classified appropriately. Accounts are separated into various categories, and they constitute the elements or components that make up the financial statements.<\/p>\n<p>Some of these broad categories are:<\/p>\n<ul>\n<li><a href=\"https:\/\/www.techopedia.com\/definition\/asset-class\">Assets<\/a><\/li>\n<li><a href=\"https:\/\/www.techopedia.com\/definition\/liability\">Liabilities<\/a><\/li>\n<li>Equity<\/li>\n<li>Revenues<\/li>\n<li>Expenses<\/li>\n<\/ul>\n<p>The result of each financial statement is calculated by using a specific formula:<\/p>\n<p><strong>1. Balance Sheet Formula<\/strong><\/p>\n<p>Assets = Liabilities + Shareholders&#8217; Equity<\/p>\n<p><strong>2. The Income Statement<\/strong><\/p>\n<p>Net profit is expressed as total revenues minus total expenses.<\/p>\n<p><strong>3. The Cash Flow Statement<\/strong><\/p>\n<p>Net cash used or generated by a company. This result is determined by deducting non-cash items and adding cash inflows and outflows not reflected in the income statement to the company\u2019s net income to calculate the ending cash balance.<\/p>\n<p><strong>4. Statement of Changes in Equity\u00a0<\/strong><\/p>\n<p>Ending shareholders&#8217; equity by calculating beginning equity plus net income minus dividends plus other comprehensive Income.<\/p>\n<h2><span id=\"what_are_the_types_of_financial_statements\">What are the Types of Financial Statements?<\/span><\/h2>\n<p><img decoding=\"async\" class=\"aligncenter size-full wp-image-137736\" src=\"https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/12\/4-Types-of-Financial-Statements.jpg\" alt=\"4 Types of Financial Statements\" width=\"1390\" height=\"1292\" srcset=\"https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/12\/4-Types-of-Financial-Statements.jpg 1390w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/12\/4-Types-of-Financial-Statements-300x279.jpg 300w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/12\/4-Types-of-Financial-Statements-1024x952.jpg 1024w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/12\/4-Types-of-Financial-Statements-768x714.jpg 768w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/12\/4-Types-of-Financial-Statements-1200x1115.jpg 1200w\" sizes=\"(max-width: 1390px) 100vw, 1390px\" \/><\/p>\n<p>There are four main types of financial statements. Below is an overview of each:<\/p>\n<h3>Balance Sheet<\/h3>\n<p>The balance sheet is a financial statement that provides a snapshot of the status of a company\u2019s assets, liabilities, and shareholders\u2019 equity.<\/p>\n<p>It adheres to the accounting equation:<\/p>\n<p><strong>Assets =<\/strong> Liabilities + Shareholders Equity<\/p>\n<p><strong>Key Components:<\/strong><strong>\u00a0<\/strong><\/p>\n<p><span style=\"font-weight: 400\"><div class=\"su-table su-table-responsive su-table-alternate\"><\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Components<\/b><\/td>\n<td><b>Description<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Assets<\/span><\/td>\n<td><span style=\"font-weight: 400\">This section expresses what the company owns and how much those possessions are worth. Assets are listed in descending order based on their liquidity. The most liquid assets are listed on top, starting with cash, while the less liquid ones are listed below such as property, plant, and equipment (PPE).<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Liabilities<\/span><\/td>\n<td><span style=\"font-weight: 400\">This category expresses how much the company owes to third parties, including suppliers, employees, and the government. Liabilities are listed in descending order based on their due date. The debts that are due the soonest are listed on top, like accounts payable, while those that will be paid years from now are listed below like long-term debt and leases.<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Shareholders&#8217; Equity<\/span><\/td>\n<td><span style=\"font-weight: 400\">This is the amount of money that shareholders have invested into the business. Other items included in this section are retained earnings, treasury stock, and special reserves.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400\"><\/div><\/span><\/p>\n<h3>Income Statement<\/h3>\n<p>The income statement reports a company&#8217;s revenues, expenses, and bottom-line profit or net income during a specific period. It is used to gauge a business\u2019s financial performance and profit-generation capacity.<\/p>\n<p><strong>Key Components:<\/strong><\/p>\n<div class=\"w-full pt-2 md:pt-0 dark:border-white\/20 md:border-transparent md:dark:border-transparent md:w-[calc(100%-.5rem)]\">\n<div class=\"relative flex h-full flex-1 items-stretch md:flex-col\">\n<div class=\"flex w-full items-center\"><span style=\"font-family: NonBreakingSpaceOverride, 'Hoefler Text', Garamond, 'Times New Roman', serif;letter-spacing: normal\"><div class=\"su-table su-table-responsive su-table-alternate\"><\/span><\/div>\n<div><\/div>\n<\/div>\n<\/div>\n<table>\n<tbody>\n<tr>\n<td><b>Components<\/b><\/td>\n<td><b>Description<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Revenues<\/span><\/td>\n<td><span style=\"font-weight: 400\">Revenues reflect the money a company has earned for selling goods or rendering services. This money is paid by customers.<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Expenses<\/span><\/td>\n<td><span style=\"font-weight: 400\">Expenses are divided into various sub-categories. The first is known as the cost of goods sold (COGS), which reflects how much a company has spent to produce or buy the products it has sold. Next up, the income statement lists all operating expenses starting with administrative, sales, and marketing disbursements and followed by certain non-cash items like depreciation and amortization. Taxes and interest payments are also considered expenses and deducted from revenues.<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Net Income<\/span><\/td>\n<td><span style=\"font-weight: 400\">This is the &#8220;bottom line&#8221; profit figure. It indicates how much the company was able to keep from the revenues it produced after all expenditures had been deducted.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400\"><\/div><\/span><\/p>\n<h3>Cash Flow Statement<\/h3>\n<p>It expands on the different items that affect the cash account to determine if the business has been producing or spending its liquid reserves during the observation period.<\/p>\n<p><strong>Key Components:<\/strong><strong>\u00a0<\/strong><\/p>\n<p><span style=\"font-weight: 400\"><div class=\"su-table su-table-responsive su-table-alternate\"><\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Components<\/b><\/td>\n<td><b>Description<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Cash from Operations<\/span><\/td>\n<td><span style=\"font-weight: 400\">This is the sum of a company&#8217;s net income plus changes in its working capital, like increases and decreases in accounts payables, receivables, and inventory.<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Cash from Investing<\/span><\/td>\n<td><span style=\"font-weight: 400\">Here, capital expenditures and financial investments, including those associated with mergers and acquisitions, are listed.<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Cash from Financing Activities<\/span><\/td>\n<td><span style=\"font-weight: 400\">The money obtained from or paid back to lenders is listed here, along with funds received from investors and dividends paid to shareholders<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400\">Net Cash Used or Produced<\/span><\/td>\n<td><span style=\"font-weight: 400\">This is the net result after all cash items have been deducted or added to the company&#8217;s net income. The result is a negative or positive figure that affects the company&#8217;s cash reserves and explains how they moved from the initial to the ending balance.<\/div><\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h3><\/h3>\n<h3>Statement of Changes in Equity<\/h3>\n<p>This statement highlights how shareholder\u2019s equity has evolved during the period by revealing movements in related accounts like retained earnings, paid-in capital, and treasury <a href=\"https:\/\/www.techopedia.com\/definition\/stock\">stock<\/a>.<\/p>\n<p><strong>Key Components:<\/strong><strong>\u00a0<\/strong><\/p>\n<ul>\n<li>Beginning and ending shareholder\u2019s equity.<\/li>\n<li>Beginning and ending retained earnings:<\/li>\n<li>Changes resulting from net income, <a href=\"https:\/\/www.techopedia.com\/definition\/dividend\">dividends<\/a> paid, new shares issued, or buybacks.<\/li>\n<\/ul>\n<h2><span id=\"what_are_the_pros_and_cons_of_a_financial_statement\">What are the Pros and Cons of a Financial Statement?<\/span><\/h2>\n<h3>Pros<\/h3>\n<ul>\n<li>Provide transparency regarding a company&#8217;s financial performance.<\/li>\n<li>Help investors and creditors make decisions.<\/li>\n<li>Track the business\u2019s progress over time.<\/li>\n<li>Require standardized reporting for consistency.<\/li>\n<li>Identify financial strengths and weaknesses.<\/li>\n<\/ul>\n<h3>Cons<\/h3>\n<ul>\n<li>Open to manipulation or creative accounting.<\/li>\n<li>Do not reflect qualitative factors.<\/li>\n<li>Require a certain level of financial literacy to be understood.<\/li>\n<li>Historical nature limits their ability to be used for predictive ability.<\/li>\n<\/ul>\n<p>Financial statements play a vital role in communicating crucial financial information to investors, creditors, regulators, and internal management.<\/p>\n<p>Though they are not necessarily accurate unless strict guidelines are followed during their preparation, financial statements are still the most powerful tools that both internal and external parties have to analyze a company\u2019s performance and financial situation.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is a Financial Statement? Financial statements are written reports created by a company&#8217;s management by using their accounting software to summarize the business\u2019s financial condition over a certain period (quarter, semester, or year). They provide crucial information to investors and other stakeholders who can learn about the current financial status of a company before [&hellip;]<\/p>\n","protected":false},"author":286654,"featured_media":137393,"comment_status":"open","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"_lmt_disableupdate":"","_lmt_disable":"","om_disable_all_campaigns":false,"footnotes":""},"definitioncat":[2686],"class_list":["post-137252","definition","type-definition","status-publish","format-standard","has-post-thumbnail","hentry","definitioncat-economics"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.2 (Yoast SEO v24.5) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is a Financial Statement? 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