financial statements

Intro To Financial Statements: For Beginners

Financial statements are important for individuals and businesses alike. They provide a snapshot of a company’s financial position and performance over a specific period of time.

Financial statements can be used to make informed business decisions, manage expenses, and assess the overall health of a company because they show the company’s revenue, expenses, profits, and losses. In order to have complete and effective financial statements, it’s important to keep records of every transaction in your business through the use of a corporate expense report.

There are four main types or examples of financial statements: the balance sheet, the income statement, the statement of cash flows, and the statement of owners’ equity. Let’s take a closer look at each one!

Balance sheet

A balance sheet is a financial statement that shows a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It is used to help analysts and investors understand a company’s financial position. The balance sheet can be summed up as: assets = liabilities + shareholders’ equity.

There are three main sections on the balance sheet: assets, liabilities, and shareholders’ equity. The assets section lists all of a company’s tangible and intangible items of value.

The liabilities section lists all of the money that a company owes to others. The shareholders’ equity section shows how much money the owners have invested in the company plus any profits or losses that have been generated over time.

It’s important to note that shareholders’ equity is different from stockholders’ equity. Shareholders’ equity shows the contribution of the owners or shareholders to the company’s assets.

This distinction is important because it shows how much money has been put into the company versus how much money directly comes from its stock shares, which would be listed in the stockholders’ equity section instead.

Balance sheet example

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A balance sheet is not to be confused with a trial balance. A trial balance is only used internally within the company to see if the total credits and debits in the books tally with each other.

Trial balance example

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Income statement

An income statement shows a company’s revenue and expenses over a specific period of time. In layman’s terms, think of the income statement as a report card for a business.

For example, if you were keeping track of your grades in school from your report cards at the end of each semester, then the income statement would be very similar to that! The income statement can be summed up as: revenue – expenses = net profit (or loss).

The top section on an income statement is generally referred to as “gross” because it includes all elements before any expenses or taxes have been taken out. By contrast, anything after all deductions is made is considered the “net” amount.

For example, if you had $10 in revenue and only spent $1 on your expenses for the month, you’d have a gross profit of $9. However, if instead of spending that dollar on expenses, you paid taxes on it at 25%, then your net profit would be reduced to $7.75. There are lots of income statement templates or profit and loss statement templates available online that can be used to prepare this.

Investors are interested in seeing whether or not profits exceed costs over time so they’ll use several different types of metrics to determine this information through an income statement including percentage change comparisons (year over year), earnings per share ratios, and cash flow statements.

The income statement can also be used to track trends between two periods of time instead of just looking at which companies are generating more cash than others. For this, companies normally use pie chart generators to see trends more easily.

Income statement example

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Statement of cash flows

A statement of cash flows shows how much money was generated by a company’s operations (inflow) and what it was used for (outflow). It shows how much cash a company has on hand and where it came from during a specific period of time.

A company’s actual balance sheet and income statement may not reflect all money on hand because they can be working with non cash assets, such as equipment or property.

A company’s cash flow statement is specifically designed to show regular cash inflows and outflows by looking at three main sections: operating activities, investing activities, and financing activities.

Statement of cash flows example

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Statement of owners’ equity

A statement of owners’ equity is a financial statement that summarizes changes to the equity accounts of a business over a specific time period. Equity, also known as net assets or capital, is determined by subtracting total liabilities from total assets.

Owners’ equity includes capital contributions from owners, earnings retained in the business and decreases due to losses incurred by the business. A company’s actual balance sheet and income statement may not reflect all money on hand because they can be working with noncash assets such as equipment or property.

Statement of owners’ equity example

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These are the basic information you need to know. If you are looking to learn more about financial statement analysis or want to get started on creating your own, be sure to sign up with Venngage.

We have a variety of tutorials and templates that can help you get started. And if you ever need any help, our team is always happy to answer any questions you may have. Thanks for reading!

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