Business Financial Statement
| The business financial statement is the primary means of communicating useful financial information. The main financial statements include the balance sheet, the income statement, and the statement of cash flows. |
The table below shows what each business financial statement communicates to financial statement users, and the basic accounting formulas used in each.
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Understanding Financial Statements
Sample Balance Sheet
The balance sheet is one of the main business financial statements that lists assets, liabilities, and the owners equity of the business. The balance sheet communicates the financial resources available to the business as of a certain date. In this way, the activity of the business is frozen to gain a snapshot of available resources as of a certain point in time. The financial resources of the business are measured in groups called assets, liabilities, and owners equity.
Assets are what the company has including cash, inventory, computer systems, furniture, machinery, buildings, land, and even intangible property such as patents, trademarks, and copyrights.
Assets are also rights to collect from customers, represented by accounts receivable, and prepaid items that have a future value to the company. If a company pays a full year’s rent, for example, prepaid rent is an asset on the balance sheet until it is consumed during the year.
Assets are listed on the balance sheet in order of liquidity, or how quickly an asset can be converted into cash, as discussed under the balance sheet format section. This means that cash is listed first, followed by the next most liquid assets.
Liabilities are what the company owes to lenders, suppliers, employees, or any other party. Liabilities are current if due within one year, or long-term if due later than one year. For example, inventory purchased on credit is a current obligation represented in accounts payable because payment is due within a short period of time, usually 30 to 90 days. A mortgage on land, on the other hand, is a long-term liability that is payable over many years.
Liabilities are also listed on the balance sheet based whether they are current or long-term obligations.
Owners equity represents the ownership interest of the business when liabilities are subtracted from assets. Owners equity is also called equity, book value, net worth, and for public corporations, stockholders equity.
If a company has assets worth $1 million and liabilities worth $700,000, then the net worth, equity, or ownership interest of the business is $300,000. This is also known as the book value of the company.
Profit and Loss Statement
The profit and loss statement, or income statement, is one of the main business financial statements that shows the profits made over a period of time after all cost of goods sold (COGS) and expenses are subtracted from sales.
Sales represent total revenue from selling a product or service.
Costs of goods sold are the cost associated purchasing or manufacturing inventory for sale.
Expenses are incurred from supporting the sale of products or services. When the total revenue is greater than total costs and expenses, the company has made a profit.
A profit does not necessarily mean the company received or even has cash on hand. For this information, we turn to the statement of cash flows.
Cash Flow Statement
The cash flow statement is one of the main business financial statements that shows the total cash inflows and cash outflows for the period. This is critical for business financial statement users since a profit on the income statement does not necessarily mean that the company received cash. The statement of cash flows shows where cash was used and spent.
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