Question

What is the purpose of each of these financial statements?

What is the purpose of the different types of financial statements

Answer 1

There are basically four types of financial statement:

1. Balance sheet:

Purpose: It tells abount the firm's financial position at a point in time i.e. of aspecific time. The firm's financial position consists of Assets (assets are the resources controlled by the firm), Liabilities (it is the amount owed to lenders and other creditors and owner's equity (it is known as the residual interest in the net assets of an entity after deducting its liabilities)

2. Income statement: It is also known as the profit and loss statement or statement of operation.

Purpose: It gives the financial performance of the firm over a period of time.

It consists of Revenues (It is the inflows from delivering or producing goods or services or any other activities which constitute entity's central operation), Expenses (it is the outflow from producing goods or delivering services which constitute entity's central operation) and gains and losses

3. Equity statement:

Purpose: It records the amounts and sources of changes in equity investors' investment in the firm over a period of time.

4. Cash flows statement:

Purpose: It details about the company's cash receipt and payment. It tells how well a company manages its cash position and can generate cash to pay its debt obligation and fund its operating expenses.

Cash flows are classified into three categories i.e. Operating cash flows (it includes the transactions which involve the normal business of the firm), Investing cash flows (it includes the transactions from the acquisition or sale of property, plant and equipment,transactions of securities and of investments in other firms) and Financing cash flows (it includes those transactions which are resulting from issuance or retirement of the firm's debt and equity securities and also include dividend paid to shareholders.)