Which financial statement shows the performance of the business for a specific time period?

What are the Types of Financial Statements?

Financial statements provide a picture of the performance, financial position, and cash flows of a business. These documents are used by the investment community, lenders, creditors, and management to evaluate an entity. There are four main types of financial statements, which are noted below.

The Income Statement

The income statement reveals the financial performance of an organization for the entire reporting period. It begins with sales, and then subtracts out all expenses incurred during the period to arrive at a net profit or loss. An earnings per share figure may also be added if the financial statements are being issued by a publicly-held company. Many organizations prepare a separate version of the income statement for internal use that compares actual results to the budget, with variances noted. This is usually considered the most important financial statement, since it describes performance.

The Balance Sheet

The balance sheet shows the financial position of a business as of the report date (so it covers a specific point in time). The information is aggregated into the general classifications of assets, liabilities, and equity. Line items within the asset and liability classification are presented in their order of liquidity, so that the most liquid items are stated first. This is a key document, and so is included in most issuances of the financial statements.

The Statement of Cash Flows

The statement of cash flows reveals the cash inflows and outflows experienced by an organization during the reporting period. These cash flows are broken down into three classifications, which are operating activities, investing activities, and financing activities. This document can be difficult to assemble, and so is more commonly issued only to outside parties.

The Statement of Changes in Equity

The statement of changes in equity documents all changes in equity during the reporting period. These changes include the issuance or purchase of shares, dividends issued, and profits or losses. This document is not usually included when the financial statements are issued internally, as the information in it is not overly useful to the management team.

Financial Statement Disclosures

When issued to users, the preceding types of financial statements may have a number of footnote disclosures attached to them. These additional notes clarify certain summary-level information presented in the financial statements, and may be quite extensive. Their exact contents are defined by the applicable accounting standards.

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Financial statements are a useful tool in analyzing your company’s financial position and performance. They are comprised of four main components, of which the balance sheet and the income statement are essential. The first item to consider when looking at a set of financial statements is whether these are external financial statements or internal financial statements.

External financial statements

External financial statements are issued for external reporting purposes. They are for investors, tax authorities or other significant partners who require financial information. External financial statements are normally produced on an annual basis, although in some cases (including for public companies) they are produced quarterly. To ensure comparability and consistency, external financial statements are usually based on Generally Accepted Accounting Principles (GAAP), which has specific requirements that must be followed.

Internal financial statements

Internal financial statements are more flexible than external financial statements and have a higher analytical component. They may report by division, have more detail or be produced on a more frequent basis (weekly, monthly or quarterly).

A set of financial statements includes two essential statements: The balance sheet and the income statement

A set of financial statements is comprised of several statements, some of which are optional. If the statements are prepared or reported by an external accountant, they will begin with a report from the accountant. This will be followed by the two essential financial statements:

• The balance sheet (sometimes also known as a statement of financial position)
• The income statement(which may include the statement of retained earnings or it may be included as a separate statement)

The balance sheet and the income statement are usually followed by the cash flow statement and notes to the financial statements.

Generally, external financial statements are prepared on the accrual basis of accounting, which means that assets and liabilities are recorded when they are committed to, and revenue and expenses are recorded when they are incurred (rather than when they are actually paid). 

The balance sheet is the critical “what do we have” statement. The balance sheet shows what the company owns (assets such as cash, accounts receivable and equipment) and what the company owes (liabilities such as accounts payable and loans). Any remaining difference between these two amounts (the assets and the liabilities) shows what belongs to the owners as their equity interest. These three amounts should always be in balance (see the fundamental accounting equation). The balance sheet presents a picture of where the company is at a certain point in time.

Income statement (profit and loss statement)

The income statement is the “what did we do” statement. The income statement, or profit and loss statement, shows how the company performed during the course of its operations for a fixed period of time. It accumulates information over a set period (typically annually, monthly or quarterly). Key elements of the income statement include revenue and expenses. Combined, these numbers yield the net income (or loss).

Statement of retained earnings

The statement of retained earnings is a measure of the assets of your operation that have been generated through profitable activity, retained in your business and not paid out to shareholders as dividends. Generally, a large amount of retained earnings is regarded as a sign that the company has done well and is reinvesting its profits in itself. That said, a startup or early-stage business often faces reporting negative retained earnings as it takes time to build a business and become profitable.

Cash flow statement

The cash flow statement shows the sources and uses of cash for a fixed period of time. The cash flow statement informs investors and creditors about the solvency of your business, where the business is receiving its cash from, and on what it is spending its cash.

Accountant’s report

When an external accountant prepares or reports on the financial statements, an accountant’s report will need to be included with the financial statements. This report tells you how much scrutiny has been applied to the financial statements and if they deviate from GAAP in any way.

Notes to the financial statements

In Canada, businesses can select the accounting standard on which to base their financial statements. The notes to the financial statements tell readers what policy choices have been made, as well as other information that can be vital to a complete understanding of the financial statements.

Summary: Financial statements have four main components (the balance sheet and income statement are essential) and help you analyze your company’s financial position and performance.

Read next: Reading a financial statement: The balance sheet (assets, liabilities and equity)

Which financial statement presents the financial performance of the business for a specific period?

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