What are the Basics of a Financial Statement?

May. 1, 2020

A financial statement is one of the basic tools that the various stakeholders in a company can use to make decisions about the financial activities of the organization. Broadly speaking, a financial statement is a record of all business activities including revenue streams, expenses, and the various other capital/financial dynamics of your companies.

From a rudimentary standpoint, financial statements are another form of company accounts—to the trained eye, they can be used to turn improve commercial outcomes. With the information found in a financial statement, businessowners can weed out possible inefficiencies, shareholders can make decisions about their investments in the company and a lot more.

The Components of a Financial Statement

There is no such thing as a financial statement by itself—it’s a collection of various accounting records that are compiled together to give a holistic image of company finances. The components of a financial statement include:

The Balance Sheet

The balance sheet gives you an overview of the company’s assets, liabilities and stockholder equity (if any) at any given time of the year. The assets listed in a balance sheet include:

  • Cash or assets equivalent to cash (like deposit certificates and treasury bills)
  • Account receivables (the money owed to the company by customers for the sale of its products and services)
  • The inventory owned by the company

    • The liabilities included in the balance sheet include:

  • All debts owed by the company
  • Rent payments, tax payments, and utility payments
  • Wages that need to be paid
  • Dividends that need to be paid to the stockholder

    • The shareholder’s equity is basically the difference between the assets and liabilities of the company. It signifies the amount of money that would be paid back to shareholders in the event that the company was liquidated, and all of the debt paid off.

    Cashflow Streams

    Income Statements

    As the name suggests, an income statement summarizes all of the revenue and profits generated by the organization. It also indicates the profits generated by the organization by subtracting all the income from the expenses of the company.

    Cashflow Statements

    The cashflow statement maps out the financial streams of the company including where the money’s coming from and where it’s going. This statement tells the investor about how well the company manages its money and whether it’s making smart financial decisions. It includes detailed information about the operational activities, the investments made and the financing that the company’s undertaken within a specified time period.
    When combined, these three components form a financial statement that is used to assess the financial health of the company and where it’s going to go from there. The financial statement is required by shareholders, key stakeholders in the company and must also be presented to the government during the tax season and yearly closing.

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