Overview of the Three Financial Statements1. Income StatementOften, the first place an investor or analyst will look is the income statement. The income statement shows the performance of the business throughout each period, displaying sales revenue at the very top. The statement then deducts the cost of goods sold (COGS) to find gross profit. Show
From there, gross profit is impacted by other operating expenses and income, depending on the nature of the business, to reach net income at the bottom – “the bottom line” for the business. Key features:
2. Balance SheetThe balance sheet displays the company’s assets, liabilities, and shareholders’ equity at a point in time. The two sides of the balance sheet must balance: assets must equal liabilities plus equity. The asset section begins with cash and equivalents, which should equal the balance found at the end of the cash flow statement. The balance sheet then displays the ending balance in each major account from period to period. Net income from the income statement flows into the balance sheet as a change in retained earnings (adjusted for payment of dividends). Key features:
3. Cash Flow StatementThe cash flow statement then takes net income and adjusts it for any non-cash expenses. Then cash inflows and outflows are calculated using changes in the balance sheet. The cash flow statement displays the change in cash per period, as well as the beginning and ending balance of cash. Key features:
How are These 3 Core Statements Used in Financial Modeling?As explained above, each of the three financial statements has an interplay of information. Financial models use the trends in the relationship of information within these statements, as well as the trend between periods in historical data to forecast future performance. The preparation and presentation of this information can become quite complicated. In general, however, the following steps are followed to create a financial model.
More ResourcesWe hope this has been a helpful overview for you of the 3 financial statements. Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To continue learning, explore these additional CFI resources:
4 Types of Financial Statements That Every Business Needs by Belle Wong, J.D.
Whether you're looking for investors for your business or want to apply for credit, you'll find that producing four types of financial statements can help you.
by Belle Wong, J.D.
If you're a small business owner, you may be thinking that your accountant is the only person who could possibly be interested in your business's financial statements. But if you're looking for investors for your business, or want to apply for credit, you'll find that four types of financial statements—the balance sheet, the income statement, the cash flow statement, and the statement of owner's equity—can be crucial in helping you meet your financing goals. Understanding Financial StatementsIt's important for the small business owner to understand these four types of financial statements and the information they provide for the investor or creditor interested in providing funds for your business. Both individually and taken together, these financial statements give a potential investor or creditor a wealth of information and can have a serious impact on your business's ability to obtain the funds or financing it needs. 1. Balance SheetAlso known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs.
It also provides users with a look at the business's financial position at a specific point in time, and financial statement analysts use the information it contains to calculate several important financial ratios. 2. Income StatementThe income statement is another important financial statement for your small business. It provides users with a picture of the business's financial performance over a specific period of time. Also known as a statement of revenue and expense, or a profit and loss statement (P&L), the income statement is a statement of earnings that shows a business's operating and nonoperating revenue and expenses. Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business's financial performance. 3. Cash Flow StatementThe cash flow statement, also known as a statement of cash flows, or a statement of changes in financial position, is an important financial statement that gives users an understanding of how well a business is managing its cash flow. Using the information in a cash flow statement, users are able to see whether a business is generating sufficient cash to meet both its debt obligations and its operating expenses. The typical cash flow statement format provides information about a business's cash from operating activities, cash from investing activities, and cash from financing activities. 4. Statement of Owner's EquityThe fourth financial statement that a business needs is a statement of owner's equity, also known as a statement of changes in equity, or a statement of shareholders' equity.
Retained earnings are often used to either reinvest in the company, or to pay off the business's debt obligations. It provides users with information regarding the financial health of a business, as it shows whether the business is capable of meeting ongoing financial and operating obligations without requiring its owners to contribute more capital. By preparing each of these financial statements, not only will you be able to provide a prospective investor or creditor with important information that they need to assess your business, but also you will be able to identify trends in your business's performance that will help you to position your business for continued success. You can work with your accounting professionals or engage an online service provider to help ensure that your business is compliant with its reporting and obligations throughout the year.
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