What Are Financial Statements?

Financial statements are written records that convey the business activities and the financial performance of a
company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure
accuracy and for tax, financing, or investing purposes. 

 Balance sheet
 Income statement
 Cash flow statement.

KEY TAKEAWAYS

 Financial statements are written records that convey the business activities and the financial
performance of a company.
 The balance sheet provides an overview of assets, liabilities, and stockholders' equity as a
snapshot in time.
 The income statement primarily focuses on a company’s revenues and expenses during a
particular period. Once expenses are subtracted from revenues, the statement produces a
company's profit figure called net income.
 The cash flow statement (CFS) measures how well a company generates cash to pay its debt
obligations, fund its operating expenses, and fund investments.

Using Financial Statement Information
Investors and financial analysts rely on financial data to analyze the performance of a company and make
predictions about its future direction of the company's stock price. One of the most important resources
of reliable and audited financial data is the annual report, which contains the firm's financial statements.

The financial statements are used by investors, market analysts, and creditors to evaluate a company's
financial health and earnings potential. The three major financial statement reports are the balance sheet,
income statement, and statement of cash flows.

Understanding Balance Sheets

The balance sheet provides an overview of a company's assets, liabilities, and stockholders' equity as a
snapshot in time. The date at the top of the balance sheet tells you when the snapshot was taken, which is
generally the end of the fiscal year.

Items Included in the Balance Sheet

Below are examples of items listed on the balance sheet.

Assets
 Cash and cash equivalents are liquid assets, which may include Treasury bills and certificates of
deposit.
 Accounts receivables are the amount of money owed to the company by its customers for the sale of
its product and service.
 Inventory

Liabilities
 Debt including long-term debt
  Wages payable
 Dividends payable

Shareholders' Equity
 Shareholders' equity is a company's total assets minus its total liabilities. Shareholders' equity
represents the amount of money that would be returned to shareholders if all of the assets were
liquidated and all of the company's debt was paid off.
 Retained earnings are part of shareholders' equity and are the amount of net earnings that were not
paid to shareholders as dividends. 

Income Statements
Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial
statements and a quarter for quarterly financial statements. The income statement provides an overview of
revenues, expenses, net income and earnings per share. It usually provides two to three years of data for
comparison.

Data From Income Statements

An income statement is one of the three important financial statements used for reporting a
company's financial performance over a specific accounting period. Also known as the profit and loss
statement or the statement of revenue and expense, the income statement primarily focuses on a company’s
revenues and expenses during a particular period.

Once expenses are subtracted from revenues, the statement produces a company's profit figure called net
income.

Types of Revenue
Operating revenue is the revenue earned by selling a company's products or services. The operating
revenue for an auto manufacturer would be realized through the production and sale of autos. Operating
revenue is generated from the core business activities of a company.

Non-operating revenue is the income earned from non-core business activities. These revenues fall outside
the primary function of the business. Some non-operating revenue examples include:

 Interest earned on cash in the bank

 Rental income from a property
 Income from strategic partnerships like royalty payment receipts
 Income from an advertisement display located on the company's property

Other income is the revenue earned from other activities. Other income could include gains from the sale of
long-term assets such as land, vehicles, or a subsidiary.

Types of Expenses
Primary expenses are incurred during the process of earning revenue from the primary activity of the
business. Expenses include the cost of goods sold (COGS), selling, general and administrative expenses
(SG&A), depreciation or amortization, and research and development (R&D). Typical expenses include
employee wages, sales commissions, and utilities such as electricity and transportation.

Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of
an asset are also recorded as expenses.

The main purpose of the income statement is to convey details of profitability and the financial results of
business activities. However, it can be very effective in showing whether sales or revenue is increasing when
compared over multiple periods. Investors can also see how well a company's management is controlling
expenses to determine whether a company's efforts in reducing the cost of sales might boost profits over time.

Data From Income Statements

An income statement is one of the three important financial statements used for reporting a
company's financial performance over a specific accounting period. Also known as the profit and loss
statement or the statement of revenue and expense, the income statement primarily focuses on a company’s
revenues and expenses during a particular period.

Once expenses are subtracted from revenues, the statement produces a company's profit figure called net
income.

Types of Revenue
Operating revenue is the revenue earned by selling a company's products or services. The operating
revenue for an auto manufacturer would be realized through the production and sale of autos. Operating
revenue is generated from the core business activities of a company.

Non-operating revenue is the income earned from non-core business activities. These revenues fall outside
the primary function of the business. Some non-operating revenue examples include:

 Interest earned on cash in the bank

 Rental income from a property
 Income from strategic partnerships like royalty payment receipts
 Income from an advertisement display located on the company's property

Other income is the revenue earned from other activities. Other income could include gains from the sale of
long-term assets such as land, vehicles, or a subsidiary.

Types of Expenses
Primary expenses are incurred during the process of earning revenue from the primary activity of the
business. Expenses include the cost of goods sold (COGS), selling, general and administrative expenses
(SG&A), depreciation or amortization, and research and development (R&D). Typical expenses include
employee wages, sales commissions, and utilities such as electricity and transportation.

Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of
an asset are also recorded as expenses.

The main purpose of the income statement is to convey details of profitability and the financial results of
business activities. However, it can be very effective in showing whether sales or revenue is increasing when
compared over multiple periods. Investors can also see how well a company's management is controlling
expenses to determine whether a company's efforts in reducing the cost of sales might boost profits over time.

The Cash Flow Statement

The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations,
fund its operating expenses, and fund investments. The cash flow statement complements the balance
sheet and income statement.

Data From the Cash Flow Statement

The CFS allows investors to understand how a company's operations are running, where its money is coming
from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid
financial footing.

There is no formula, per se, for calculating a cash flow statement. Instead, it contains three sections that report
cash flow for the various activities for which a company uses its cash. Those three components of the CFS are
listed below.

Operating Activities 
The operating activities on the CFS include any sources and uses of cash from running the business and
selling its products or services. Cash from operations includes any changes made in cash, accounts
receivable, depreciation, inventory, and accounts payable. These transactions also include wages, income tax
payments, interest payments, rent, and cash receipts from the sale of a product or service.

Investing Activities
Investing activities include any sources and uses of cash from a company's investments into the long-term
future of the company. A purchase or sale of an asset, loans made to vendors or received from customers or
any payments related to a merger or acquisition is included in this category.

Also, purchases of fixed assets such as property, plant, and equipment (PPE) are included in this section. In
short, changes in equipment, assets, or investments relate to cash from investing.

Financing Activities
Cash from financing activities include the sources of cash from investors or banks, as well as the uses of cash
paid to shareholders. Financing activities include debt issuance, equity issuance, stock repurchases, loans,
dividends paid, and repayments of debt.

The cash flow statement reconciles the income statement with the balance sheet in three major business
activities.