Financial Statements: List of Types and How to Read Them

Most firms prepare their Statement of Financial Position as at the 31st of December each year. Normally, such statements are prepared for two consecutive periods—the current year and the comparative previous year. The cash flow statement measures how well a company generates cash to fund the operating activities, pay its debt and fund investments. You’ll also need to analyze your accounting to ensure all three financial statements reflect the true state of your operations. All major accounting tools can generate the three primary financial statements automatically, but without expert guidance, your startup might make mistakes. Cash flow statement shows the movement of cash and cash equivalents, it is an in-depth inflow and outflow for a given period of time.

The financing cash activities focus on capital structure financing, showing proceeds from debt and stock issuance as well as cash payments for obligations such as interest and dividends. Profit and cash generation are two different things, that’s why companies also need a statement to illustrate any changes in the cash balances during a given period. The Cash Flow Statement compiles cash and cash equivalents that have been generated (cash inflows) and spent (cash outflows) within a fiscal period. In our financial models we always have an integrated set of financial statements which includes a balance sheet, income statement and cashflow statement.

How The 3 Financial Statements Of A Business Are Interdependent & Interconnected

Therefore, analyzing a company’s Cash Flow Statement is an inextricable part of a thorough financial statements analysis. You’ll have a summary of what ABC Corporation owes and owns at a certain date. Think of it as a “snapshot” of the company’s financial position as at a given point in time.

For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar but different set of financial statements. The first (and arguably most important) of the three basic types of financial statements is the profit and loss statement. It summarizes the revenue, cost of sales, gross margin, and operating expenses incurred in a specific period of time. Accurate P&L statements are fundamental to Generally Accepted Accounting Principles (GAAP) and contain values for current assets, liabilities, and equity. The income statement illustrates the profitability of a company under accrual accounting rules.

Create a free account to unlock this Template

On a high-level, the most obvious change is to the acquirers fixed assets, as the company will own everything the previous company (the acquiree) owned. When acquisitions are made, the acquirers cash and debt levels will also be affected. Acquirers are also likely to pay over the asking price of the acquiree because of “goodwill,” which is an intangible asset.

Anyone can learn how to create and draw insights from a company’s financial reports. Investors, business owners, and project managers need to understand the results and trends to drive the business successfully. Financial statements are also read by comparing the results to competitors or other industry participants. By comparing financial statements to other companies, analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry. Last, financial statements are only as reliable as the information being fed into the reports. Too often, it’s been documented that fraudulent financial activity or poor control oversight have led to misstated financial statements intended to mislead users.

Restaurants Start Bleeding Money Even Before They Open- A Way To Restaurant Sustenance!

The 3 primary financial statements in accounting are the profit and loss (or income) statement, balance sheet, and cash flow statement. We’ve introduced these major financial reports in previous blogs, and we’ll link to those pieces throughout this article. Whether you’re founding a startup or jumping on board at a promising company, these reports play a vital role in your finances—and Zeni’s expert team can help you generate the 3 financial statements more accurately.

In the asset portion of the balance sheet, analysts will typically be looking at long-term assets and how efficiently a company manages its receivables in the short term. The stock price for a given company can advance or decline based on a wide variety of factors. However, companies that perform well financially by increasing their earnings, net worth and cash flow are typically rewarded with a higher stock price over time. As you can see in the image above, total CapEx is equal to the sum of the fixed asset dollar amounts (for the lemon crusher, ice machine, and refrigerator).

Statement of Cash Flows

Those statements showcase the overall health of your company, and your accounting decisions can change the overall picture you’re presenting. The third part of the financial statement trio is a cash flow statement. Cash flow statements can be used to track inflows and outflows and find ways to improve a business’s financial position to achieve long-term goals. Interest income is the money companies make from keeping their cash in interest-bearing savings accounts, money market funds and the like.

• The operating revenue for an auto manufacturer would be realized through the production and sale of autos.
• It’s called “gross” because expenses have not been deducted from it yet.
• Think of it as a “snapshot” of the company’s financial position as at a given point in time.
• However, companies that perform well financially by increasing their earnings, net worth and cash flow are typically rewarded with a higher stock price over time.

Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about the future direction of the company’s stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm’s financial statements. Overall, top-performing companies will achieve high marks in operating efficiency, asset management, and capital structuring. Cash flow from investing includes cash received from or used for investing activities, such as buying stock in other companies or purchasing additional property or equipment. Cash flow from financing activities includes cash received from borrowing money or issuing stock, and cash spent to repay loans. The income statement is read from top to bottom, starting with revenues, sometimes called the “top line.” Expenses and costs are subtracted, followed by taxes.

Cash balance

The income statement makes public the results of a company’s business operations for a particular quarter or year. Through the income statement, you can witness the inflow of new assets into a business and measure the outflows incurred to produce revenue. After the 1929 market crash, the government enacted legislation to help prevent history of federal income tax rates a repeat disaster. To this day these reforms require publicly traded companies to regularly disclose certain details about their operations and financial position. Clearly, the linkage of depreciation between the three primary financial statements is real, but this can be more difficult to identify than net income linkage.

The end result is the company’s net income—or profit—before paying any dividends. After the acquisition officially closes, it will affect all areas of the income statement. This is because the acquirer (the company that gains control of the acquiree) must account for all the acquiree’s revenues and expenses going forward.

Analyzing Income Statements

On the balance sheet, accumulated depreciation reduces the value of plant, property and equipment (PP&E) (aka capital expenditures or CapEx for short). CapEx is money a company spends to acquire (growth CapEx) or maintain fixed assets (maintenance CapEx). This is the short answer on how depreciation links the three primary financial statements. The three main financial statements are the balance sheet, income statement, and cash flow statement. Each of these statements provides a different perspective on a company’s financial situation.