Financial statements are essential documents detailing how a company earns and spends its money. According to the Securities and Exchange Commission (SEC) website, there are four basic types of financial statements. These include income statements, balance sheets, cash flow statements and statements of shareholders’ equity. Each type of financial statement has a specific use. Using the correct type of statement for the appropriate situation ensures the business maintains regulatory compliance while providing company leaders with the information necessary to make good decisions when determining the future of the company.
The income statement is also sometimes referred to as the statement of income, profit and loss statement (P&L) or statement of operations. The income statement illustrates the profitability of a company over a given period of time. This statement typically includes one section detailing revenues and gains and another section detailing expenses and losses. If the company’s revenues and gains are greater than its expenses and losses, then the income statement will show a net profit. However, if the company experiences greater expenses and losses, the income statement shows a net loss. In other words, the income statement shows whether the company turned a profit within the period.
The balance sheet provides an overview of the company’s financial situation at a specific time, rather than profitability over a period of time. The balance sheet includes the company’s assets, liabilities and owners' or stockholders' equity. The company’s assets must always equal its liabilities plus owner equity. The balance sheet helps business owners and managers maintain a firm grasp on the business’s current financial situation in order to make appropriate financial decisions. For example, a lengthening receivables cycle may call for more aggressive collection practices.
Cash Flow Statement
The cash flow statement (CFS) records the amount of actual money that flows into and out of the company. According to a 2010 Forbes articles entitled, “What is a Cash Flow Statement?” the “CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.” The cash flow statement helps investors and potential investors determine whether a company can be trusted to spend their money wisely.
Each type of financial statement provides financial decision makers with different types of information necessary to run the company. For example, the income statement details the company’s revenues, gains, expenses and losses but does not include cash receipts or cash disbursements. Meanwhile, the balance sheet often includes what might be referred to as theoretical money such as money that is owed to the company but not yet collected, while the cash flow statement reports money actually received or paid.
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