Businesses use financial statements across industries to track their financial data accurately. They are important for summarizing, sharing, and forecasting financial information that can be used to make key business decisions for internal teams and shareholders. Understanding the different types of financial statements can help you interpret existing financial statements and generate your own. In this article, we discuss what the different financial statement types are, how to decide which one to use, and who can use these statements to make accurate and informed decisions.
What are the different financial statement types?
There are several financial statement types that companies can use for different purposes. Those statements can include:
Income statements
An income statement is a business document that shows the revenue and expenses of a business over a specified time. It highlights four key items, including cash gains, losses, revenue, and expenses. Income statements begin with the detail of sales and conclude with the net income after expenses, and eventually net earnings per share. Businesses can be generate these statements monthly, quarterly, or yearly, depending on the needs of a business.
Income statements provide valuable insights into the operating costs of a business and how many resources go into producing the product or service that generates revenue. It provides insight on the efficiency of management, which sectors are underperforming, and how a business is operating in relation to other competitors in the industry. The earnings per share portion of the income statement is useful for investors as it reflects how much revenue they are earning on their investment and how much they would earn if their company was the liquidate all its assets.
Balance sheet
Businesses use balance sheets to address the financial standing of the business at the time of the report's creation by listing the organization's assets, liabilities, and equity.
Assets: Assets are anything that a business owns that holds value and contributes to the total value of the business. Resources can be anything that can provide a future economic benefit to a business and are typically physical items that appreciate in value. Assets can include buildings, vehicles, inventory, investments, property, or cash assets.
Liabilities: Liabilities are financial items that are owed by a business in the future that may or may not appreciate in value. Payment or transfer of economic value settles liabilities over time, such as providing a service for the value of the good. Liabilities can include loans, mortgages, bonds, deferred revenues, warranties, and accrued expenses.
Equity: Equity represents the initial amount of capital invested in a business. If a business decides to reinvest its earnings into their business operations at the end of their financial year, they can transfer the equity portion of the income statement to the balance sheet as shareholders' equity. Equity can include common or preferred stock, dividends, or kept earnings.
Cash flow statements
A cash flow statement is a financial statement that shows how changes to the balance sheet and its income can affect the input and output of cash that a business has available for use. It tracks the movement of cash and cash equivalents as they move through a business and summarizes them in a uniformed statement. Companies often organize these financial reports into three different sections:
Operating activities: Operating activities included on the cash flow statement feature any uses or sources of cash that come from business operations. It reflects how much cash a business generates from its sales. Operating activities can include interest or income tax payments, receipts of sale, payments made to suppliers, salaries and wages, rent payments, and any other expenses that go directly into the production and operating process.
Investing activities: Investing activities in a cash flow statement include any uses or sources of cash from a business's investments. Investing activities can be changes in the value of an asset, changes in equipment, investments made by the business. Businesses can consider any purchases of assets, sales of assets, or loans or merger & acquisition payments as investing activities.
Financing activities: Financing activities on the cash flow statement are any cash uses or inputs that come from investors or banks and any amounts paid out to shareholders. This can include dividends that are issued to shareholders at the end of the financial year and any debt repayments made. Anything that adds to the company's spending ability or its generated expenses companies can add to their financing activities section.
Cash flow statements can provide valuable insights into how a business manages its cash flow and how quickly a business can generate any cash needed for its debts and operations. A cash flow statement can be useful to investors, as it can show them how a business may use the invested capital and how much risk they hold when making repayments.
Statements of equity changes
Statements of equity changes refer to stocks purchased, dividends issued to investors, and the company's overall profits and losses within a reporting period. Companies often create these financial statements for investors and company shareholders because they don't incorporate a lot information that a company's management team or employees would find valuable. These financial statements often get a lot of their material from information listed on both the balance sheets and company income statements.
How to decide on a financial statement
Here is a list of steps you can follow to help you determine which financial statement you may want to consider using:
Know who the report is for
Deciding which financial statement to use often depends on who might read it and what they may want to learn from the information. For example, if a company wants to create a financial statement for its management team to find and solve problems with expenses and spending, a company might find the most value in using either the cash flow statement or the income statement.
Organize your information
When generating financial statements, it's important to have all the information that is required to create an accurate representation of a company. If you can't provide everything that a financial statement is asking for, consider using a different variation. For example, if a brand new company tried to create a cash flow statement, they might find it challenging to create a thorough document because it's meant to show fluctuations over a long period of time.
Understand what each report does
Understanding the basic principles of each report and what they can reveal about a company can help you prepare for creating financial statements. For example, if you're trying to create a report for investors, though every financial statement gives them beneficial information, the income statement and the statements of equity changes might be the most helpful and informative.
Who can use financial statements?
There are several people who can use financial statements to benefit their knowledge and decisions, including:
Investors
Investors frequently look at the financial statements of the businesses they're interested in investing capital into. Financial statements give investors insight into business operations, management success, and the financial outlook which they can use to make investment decisions. As investors are not internal team members, they rarely have access to business plans and operating activities, so having financial statement can allow them to make more educated decisions. Investors can also use financial statements to check the accuracy of news releases and company news before they choose to invest.
Business executives
Business executives can use the different financial statement types to make educated decisions about the future direction of their business. Financial statements give executives a summary of business operations and can help them identify areas of weakness and areas of strength. This insight can be used to make key decisions regarding budgeting, funding, department cuts and more. Financial statements also give executives an idea of how their business is being perceived by the public, as they can see the same records that investors are viewing. This can help them predict cash flow, investing, and funding.
The public
The general public can use financial statements to see how different businesses are operating and how they compare to other businesses in the industry. This can help when completing an analysis of competitors and can help businesses establish their position in the industry. As the financial statements of publicly traded companies are accessible by the public, anyone can see how a business is performing and how changes in the industry may affect them. Professionals can use this information to forecast economic changes such as recessions and economic downturn, allowing them to change their own business ahead of time.