Question

financial statement ( types and uses for each

Answer 1

Financial statements:

The financial statements refer to the formal record of the company’s activities. It contains all the material information and figures related to the business. There are mainly four types of financial statements suggested by Securities and Exchange Commission (SEC).

1. Balance sheet
2. Income statement
3. Statement of cash flows
4. Statement of shareholders’ equity

Balance sheet: The balance sheet is used to showcase the financial position of the company. It consists of three components: Assets, Liabilities, and Equity.

The assets are the items that the business owns on a specific period.

The liabilities are the items that the business owes to other outside parties.

The equity shows the amount owes to the owner of the company.

Use: The balance sheet is used to track the financial position, liquidity, capital structure of the company.

Income statement: The income statement is used to showcase the operating performance of the company. It shows the net revenue generated by the company and the total expenses incurred to generate that revenue level. The net profit is calculated by subtracting the total expenses from the total revenue.

Use: The income statement is used to track the operating performance of the company. It can be used to track the cost of goods sold, operating expenses, and non-operating expenses of the company. It is very helpful in eliminating the bottleneck in the process.

Statement of cash flows: The statement of cash flows shows the change in cash during a specific period. It has three sections: Cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

Use: The statement of cash flow is used to track the cash activities of the company. It provides the sources and application of the cash in a specific period. It is a helpful tool in analyzing the liquidity of the company and it provides measures for the long-term solvency of the company.

Statement of change in equity: This statement shows the change in the equity of the company. It considers the items that would affect the shareholders equity such as net income, dividend, treasury stock purchase etc. The adjustments are adjusted in the opening balance of equity to calculate the closing balance of equity which would appear in the balance sheet.

Use: The statement of change in equity is helpful in determining the items responsible for the change in the equity structure of the company.

Although there is another financial statement which is prepared in accounting which is retained earnings statement. It shows the change in the retained earnings of the company in a year. It records the items that affect the retained earnings of a certain period such as net income, dividend, provisions etc. However, according to SEC, there are only four main financial statements which are defined above.

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