Let’s take a look at the primary financial statements used in financial reporting and what each will tell you about the company.
A balance sheet
Is a snapshot of what the company owns and how it financed what it owns, through borrowing or through the company owners’ investments.
A balance sheet is based on the standard accounting model:
Assets = Liabilities + Equity.
The balance sheet breaks down these components and reports the company’s assets, liabilities, and equity.
These are the things that a company owns or is owed, including cash. Liabilities are what the company owes to other companies or to individuals.
Equity is the amount that the owners including shareholders, if applicable have invested. Plus retained earnings or losses that’ve accumulated since the company was started that were not paid out as dividends, but reinvested into the company.
An income statement
Also known as a profit and loss statement, reports on the company’s earnings over the reporting period. It will tell you the amount of revenue the company generated, what it cost to earn that revenue, and the general expenses incurred to operate the business. If revenue is greater than expenses, then the income statement will reflect a net profit for the reporting period. If expenses exceeded revenue, then the company suffered a net loss for the period.
And since there are four main financial statements, other statements include Cash flow statements. This shows the exchange of money between a company and the outside world also over a period of time. With the fourth financial statement, called a “statement of shareholders’ equity,” shows changes in the interests of the company’s shareholders over time.