Delving into the world of corporate finance, this article offers an in-depth look at the four fundamental financial statements that form the backbone of a company's financial reporting:
- Income statement
- Balance sheet
- Cash flow statement
- Statement of retained earnings
You’ll learn how the balance sheet captures a company’s financial position at a specific point in time, while the income statement reveals profitability over a specific time period. You’ll come to understand how the cash flow statement tracks the movement of cash and why the statement of retained earnings is crucial for investors. This guide not only covers the core concepts but also adapts to the varying financial reporting frameworks like GAAP and IFRS, making it an essential read for those pursuing financial clarity in the global business landscape.
Essentials of Financial Reporting
Financial statements are documents that convey a company’s business activities and financial performance. As the U.S. Securities and Exchange Commission (SEC) succinctly put it, “They show you where a company’s money came from, where it went, and where it is now.”1
The line items in a financial statement will vary from one corporation to the next, but the most common among them are revenues, costs of goods sold, taxes, cash, marketable securities, inventory, short-term debt, long-term debt, accounts receivable, accounts payable, and cash flows from investing, operating, and financing activities.
It’s not unusual for government agencies or accounting firms to audit an organization’s financial statements for tax, financing, or investing purposes, as well as to confirm and ensure overall accuracy and regulatory compliance.
In asking, “What are the different types of financial statements?” it’s important to remember that financial statements vary not only between companies but between countries. While companies in the United States adhere to rules known as Generally Accepted Accounting Principles, international companies often go by the International Financial Reporting Standards (IFRS).2
William & Mary’s Online Master of Accounting (MAcc) program includes a course in Financial Statement Analysis and Valuation. Students learn careful analysis of these essential documents, “with an emphasis on risk management activities and transactions impacting owner’s equity.”3
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
Types of Financial Statements: Income Statement
Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time. It presents revenues, expenses, profits/losses, net income (the amount remaining after expenses are subtracted from revenues), and earnings per share—that is, the company’s operating results. It covers a range of time, such as a year, a financial quarter, and so on. Its main purpose is to convey details of profitability and the financial results of business activities. When compared across multiple reporting periods, it can be highly useful in determining whether the company’s revenue is increasing. Investors rely on the income statement to indicate how well management is controlling expenses, which can, of course, help increase profits.2
An income statement will reflect multiple forms of revenues and expenses. For example:
This is the revenue generated by selling a company's products or services—its core business: the production and sale of cars for an auto company, tickets and concessions for a movie theatre, and so on.
This is the income earned from non-core business activities—those that fall outside the company’s primary function. For example:2
- Interest earned on cash in the bank
- Rental income from a property
- Income from strategic partnerships, such as royalty payment receipts
- Income from an advertisement display located on the company's property
This is the income earned from other activities, such as gains from the sale of long-term assets including vehicles, land, or a subsidiary.
A company incurs primary expenses during the process of earning money from its primary activity. Such expenses include:
- The cost of goods sold (COGS)
- General and administrative expenses (SG&A)
- Depreciation or amortization
- Research and development (R&D)
Typical expenses include employee wages, sales commissions, and utility costs such as power and transportation. Expenses linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses.2
Types of Financial Statements: Balance Sheet
In contrast to the income statement, the balance sheet reflects information as of a specific date. In the words of the SEC, it shows “what a company owns and what it owes at a fixed point in time.”1 The second most important financial statement, it gives information about the organization’s liquidity and capitalization: its assets, liabilities, and equity as of the reporting date, which is usually the end of the reporting period.2,4
The items listed in a balance sheet consist of these:2
- Liquid assets: cash and cash equivalents, including treasury bills and certificates of deposit
- Accounts receivable: the amount of money owed to the company by its customers for the sale of its products and services
- Inventory: the finished goods, works in progress, or raw materials that the company has on hand and intends to sell as a course of business
- Prepaid expenses: costs that have been paid in advance of their due dates. They’re recorded as assets because their value has not yet been recognized; if the benefit is not recognized, a refund would be due to the company
- Capital assets: property, plant, and equipment (including buildings used for manufacturing and heavy machinery used for processing raw materials) owned by the company for its long-term benefit
- Investments: assets not used in operations but held for speculative future growth
- Intangible assets: trademarks, patents, and goodwill; these can't be physically touched but have future economic, often long-term, benefits for the organization
- Accounts payable: the bills (including utility bills, rent invoices, and obligations to buy raw materials) due as part of the company’s normal course of operations
- Wages payable: payments due to employees for time worked
- Notes payable: recorded debt instruments that record official debt agreements, including the payment schedules and amounts
- Dividends payable: as-yet-unpaid dividends that have been declared to be awarded to shareholders
- Long-term debt: this can include diverse obligations, including sinking bond funds, mortgages, or other loans that are due in full in more than a year; the short-term portion of this debt is recorded as a current liability
Also known as stockholders’ equity, this is a company's total assets minus its total liabilities. It represents the amount of money that would be returned to shareholders if all of the company’s assets were liquidated and all of its debt paid off. A component of shareholders’ equity, retained earnings are the amount of net earnings that were not paid to shareholders as dividends.
Types of Financial Statements: Cash Flow Statement
The cash flow statement (CFS) measures how well the company generates cash to pay its debts and fund its operating expenses and investments. It helps investors see whether or not the company is on strong financial ground by showing where its money comes from and how it’s being spent.2 Detailing the exchange of money between the company and the outside world also over a period of time,1 the CFS can be useful when compared to the income statement, especially when the amount of reported profit or loss does not reflect the company’s cash flows.4
Used to reconcile the income statement with the balance sheet, the three sections of the CFS concern various cash-bound activities:2
This section addresses sources and uses of cash from running the business and selling its products or services. Those can include any changes made in cash accounts receivable, depreciation, inventory, and accounts payable—such as wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.
This section details sources and uses of cash from the company's investments in its long-term future. That includes purchase or sale of an asset, loans made to vendors or received from customers, and any payments related to a merger or acquisition. Purchases of fixed assets such as property, plant, and equipment (PPE) are also included in this section.
This section shows the net cash flows that are used to fund the company. Financing activities include transactions involving debt, equity and dividends. By reviewing this section of the cash flow statement, a company’s investors can gain insight into the company’s financial strength and how well it’s managing its capital structure.5
Types of Financial Statements: Statement of Retained Earnings
This document shows changes in equity—including the sale or repurchase of shares, dividend payments, and changes caused by reported profits or losses—during a given reporting period.
Also called a statement of owner's equity, an equity statement, or a statement of shareholders' equity,6 this is the least commonly used of the financial statements. Its report format can vary, and it’s typically only included in a company's audited financial statement package.4
Types of Financial Statements for Not-for-Profit Organizations
Because of the differences between for-profit and philanthropic organizations, the financial statements used in the not-for-profit world vary somewhat from those used by corporate institutions. Nonprofit organizations record their financial doings using these standard documents:2
Statement of Activities
This is the equivalent of a for-profit company’s income statement. It reports the changes in operation over time, including donations, grants, event revenue and expenses.
Statement of Financial Position
The equivalent of a for-profit entity's balance sheet, this document differs from it primarily in that nonprofit organizations do not have equity positions. Residual balances after all assets have been liquidated and liabilities have been satisfied are referred to as “net assets.”
Statement of Cash Flow
Closely aligned with a for-profit company’s cash flow statement. The listed accounts will likely vary, but this statement is also broken out into operating, investing and financing activities.
Statement of Functional Expenses
This document is unique to non-profit organizations. It tracks expenses by entity function, typically separated into administrative, program and fundraising expenses. Disseminated to the public, the statement of functional expenses details what proportion of company-wide expenses are related directly to the company’s mission.
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- Retrieved on November 21, 2022, from sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html
- Retrieved on November 21, 2022, from investopedia.com/terms/f/financial-statements.asp
- Retrieved on November 21, 2022, from online.mason.wm.edu/macc#course-options
- Retrieved on November 21, 2022, from accountingtools.com/articles/the-four-basic-financial-statements.html
- Retrieved on November 21, 2022, from investopedia.com/terms/c/cashflowfromfinancing.asp
- Retrieved on November 21, 2022, from investopedia.com/terms/s/statement-of-retained-earnings.asp