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 statements
It'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 sheet
Also 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.
Based on the basic accounting equation, or balance sheet equation [Assets = Liabilities + Equity], the balance sheet provides a snapshot of a business's assets, liabilities, and equity.
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 statement
The 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 statement
The 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 equity
The 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.
It shows the business's retained earnings—the profit kept, or retained, within a business rather than distributed to owners or shareholders—both at the beginning and at the end of a specific reporting period.
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.
Find out more about Business Accounting
FAQs
There are four primary types of financial statements:
- Balance sheets.
- Income statements.
- Cash flow statements.
- Statements of shareholders' equity.
Financial statements can be divided into four categories: balance sheets, income statements, cash flow statements, and equity statements.
What are examples of the 4 financial statements? ›
For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity.
Which of the following are the 4 basic financial statements? ›
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
What are the 4 basic financial statements in order of preparation? ›
The four financial statements (in order of preparation) are the income statement, statement of retained earnings (or statement of shareholders' equity), balance sheet, and statement of cash flows.
Which of the 4 financial statements do you think is the most important and useful in predicting a company's success? ›
The balance sheet is particularly important as it provides a snapshot of a company's financial position at a specific moment in time, empowering a business owner or manager to establish the company's most important ratios such as solvency versus liquidity that are particularly important for debt management.
Which of the 4 financial statements is the most important? ›
The most important financial statement for the majority of users is likely to be the income statement, since it reveals the ability of a business to generate a profit. Also, the information listed on the income statement is mostly in relatively current dollars, and so represents a reasonable degree of accuracy.
What are 5 elements of financial statements? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
What four statements are contained in most annual reports? ›
The four financial statements contained in most annual reports are: (1) balance sheet; (2) income statement; (3) cash flow statement; and (4) statements of shareholders' equity. The balance sheet provides an overview of company assets and liabilities. The income statement provides an overview of sales and expenses.
What are the three 3 most common financial statements? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
What three qualities make financial information useful? ›
What makes a financial statement useful? FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
What are the 4 components of accounting procedures? ›
The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance. We begin by introducing the steps and their related documentation.
Which is not one of the 4 types of financial statements? ›
The audit report is not one of the four basic financial statements.
Which of the 4 basic financial statements have the following key elements operating activities financing activities and investing activities? ›
The cash flow statement is the least important financial statement but is also the most transparent. The cash flow statement is broken down into three categories: Operating activities, investment activities, and financing activities.
What are the 3 main financial statements in accounting? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are the 5 components of the financial statement? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
What are the 5 statements of accounting? ›
Statement of financial position (balance sheet); Statement of income and expense (profit and loss account); Statement of cash flows (cash flow statement); Statement of changes in equity; and.
What are the 5 methods of financial statement analysis? ›
There are five commonplace approaches to financial statement analysis: horizontal analysis, vertical analysis, ratio analysis, trend analysis and cost-volume profit analysis.
