Financial statements are an accounting and official bookkeeping record of the financial activities of a business, individual, or even non-profit organization. The statements are essentially written reports that detail the financial strength, performance, and liquidity of these entities. A good financial statement is a snapshot of the bottom line and everything to do with the entity. No matter what the entity or purpose for pulling together the statements, below are the four most common.
1. Income Statement
Ever hear one of the guys or gals of the ABC show “Shark Tank” ask a contestant how much in sales they do per year? They are basically asking for a shortened income statement type of financial statement to assess how profitable they have been up until now. Also known as the profit and loss sheet, this financial statement reports its financial performance in terms of profit over loss over in a specific period of time. It is composed of the following two parts:
- Income – What the entity earned over a certain period that can include total sales, dividend income, investments, etc.
- Expenses – The cost of doing business for the entity that was incurred over the same period such as payroll, rent, depreciation, taxes, etc.
2. Statement of Financial Position
This is another official name for the balance sheet. It is one of the most requested financial statements because it reports the assets, liabilities, and calculates the difference in totals. The amounts reported on the financial statement are most commonly for the totals at the end of an accounting period or financial quarter. The formula for creating a statement of financial position is:
- For profit corporation – Liabilities + Stockholders’ Equity = Assets
- Non-profit organization – Liabilities + Net Assets = Assets
3. Cash Flow Financial Statement
The cash flow financial statement represents the flow of cash and bank balances over a certain period. Cash flow movement can be classified into three separate parts:
- Investing flow: The numbers that detail cash flow from the sale and/or purchase of investments assets that do not include inventories such as purchase of a warehouse, land, or stock.
- Financial flow: The numbers that detail assets spent and/or generated when raising and repaying share capital and debt combined with payments of dividends and interest.
- Operational flow: The numbers that represent cash flow from the primary activity or activities of the entity.
4. Changes in Equity
The changes in equity financial statement is also referred to as a statement of retained earnings and shows changes in equity for activities such as forming partnerships, sole proprietorships, corporations, or similar. The purpose of this statement is to represent the financial activity in the changes in equity for the period. This can include any or all of the following:
- Profit or loss (net) during the period of change
- Dividend payments
- Share capital that was issued or collected
- Losses or gains directly associated in the equity
- Even the negative effects of an accounting change or correction in bookkeeping or accounting errors
Financial Statements in Houston
And if you are in need of expert financial statement services in Houston or the surrounding area to keep your business from making costly errors, please contact us.