What Are the Five Types of Financial Statements And How to Understand Them
Financial statements are the documents compiled by United States business entities to outline each entity’s financial position, activities, and overall information. A financial statement is meant to give an idea of a company’s financial condition, including revenues, expenses, assets and liabilities, cash flow, and more.
Various individuals and bodies use an entity’s financial statements to understand more about that entity. Corporate management teams, investors, stock shareholders, employees, customers, clients, governmental authorities, stock exchanges, and other parties can benefit from the detailed financial information laid forth in an entity’s financial statements. In the United States, there are five different types of financial statements, which we have discussed in detail below.
To understand more about the basic types of financial statements check out this governmental guide on the matter.
The Five Types of Financial Statements
- The Income Statement
The income statement is intended to show revenues, operating expenses, profits, and losses for a specified period (such as a fiscal year). In essence, this type of statement shows what the company made and spent (and earned or lost) while executing operating activities for the reporting period in question. This type of statement is also often referred to as a Profit and Loss Statement, or P&L. It is an accurate reflection of a company’s net income/net profit or net losses.
In other words, an income statement is a report that shows how much revenue a company earned over a specific time period. It shows the costs and expenses associated with revenue. The literal Bottom Line of the statement displays the company’s net earnings or losses. This conveys how much the company earned or lost over the time period.
- The Balance Sheet
The balance sheet gives an at-a-glance impression of a company’s overall financial condition or financial position. Line items show the values of an entity’s fixed assets, liabilities, capital, and equity—which is to say, an overview of everything a company owns and everything it owes. Financial analysts refer to the balance sheet interchangeably as the Statement of Financial Position.
In other words, it provides detailed information about a company’s assets, liabilities and shareholders’ equity, where:
- assets are what company owns that have value
- liabilities are what companies owe to others (and its financial value)
- shareholder's equity is capital or net worth. It's a financial value left when all assets would be sold and all liabilities paid
- The Statement of Shareholder Equity
The statement of Shareholder's Equity (mentioned above) reflects the movement of equity for an entity over a particular period. This document may include shareholder contributions, details about share capital, a breakdown of dividend payments, earnings per share, and more. This statement is known by several other names, including statement of owner equity and statement of retained earnings.
This financial statement is often tagged along in a group of other balance sheets.
- The Statement of Cash Flow
The Statement of Cash Flow shows the changes in cash flow for an entity over a certain period. This type of statement should reflect the business’s Inflows and outflows of cash, which should break down into three separate parts: cash flow from the operation, cash flow from investing activities, and cash flow from financing activities.
You can understand this statement as a company's outflow and inflow of cash. The company needs to have sufficient cash at hand to pay its expenses and purchase assets. While income statements convey information about whether the company made a profit, this statement figures if the company generated cash.
To learn more about Cash Flow Statement please refer to this guide by Wikipedia.
- The Notes to Financial Statements
Technically, there are only four types of financial statements for a business entity. The fifth category is Notes to Financial Statements, or Footnotes that are included on other types of financial statements. However, while these notes are not necessarily a type of financial statement on their own, they are so informative and so important that they still bear mentioning.
Notes to financial statements must include specific disclosures, including details about the entity’s accounting policies, its income taxes, its employee pension plans or retirement programs, and its stock options.
As you can see, these statement reports all serve crucial roles. Separately, each type of financial statement gives a different snapshot of an entity’s financial reality at a particular point in time.
These five financial statements are:
- The Income Statement (pointing out if the company made a profit, also called Profit & Loss Statement)
- The Shareholder's Equity Statement (Net Worth, or Capital statement)
- Cash Flow Statement (states whether the company generated cash)
- Balance Sheet Statement (quick overview of company's health)
- The Notes to Financial Statements (not actual statement, yet not less important)
Together, the statements give a full review of a company’s financial position during the reporting period in question. In terms of financial health, monitoring, reporting, control, transparency, and all other aspects of accounting, these statements and the information they provide are important and invaluable.