The primary three types of financial statements are the balance sheet, the income statement, and the cash flow statement. Each offers unique details about a business’ activities and together provide a comprehensive view of a company’s operating activities. We’re going to explain each and show you how these three types of financial statements all fit together. Show
The Balance SheetThe first of the three types of financial statements is the balance sheet. The balance sheet provides a snapshot of a company’s financial position at a given point in time. It shows the company’s assets (what the company owns), liabilities (what it has borrowed), and shareholders’ equity (investment and retained earnings). These numbers should balance each other out: Assets = Liabilities + Equity. A balance sheet can be prepared daily, weekly, monthly, quarterly, or annually. Many small businesses prepare their balance sheets monthly, perhaps quarterly for smaller businesses. Analysts can use a balance sheet to identify the health of a company using metrics such as the Current Ratio and Debt/Equity Ratio. The Income StatementThe income statement is sometimes called the Profit and Loss statement (or P&L). The income statement shows the revenue a company earns and the expenses involved in its operating activities. The difference between revenue and expenses represents the company’s net profit for a given period of time. It does this by showing the sales revenue at the top and then deducting direct and indirect expenses. Direct expenses are your cost of goods sold (COGS). This provides us with gross profit. Indirect expenses include operating expenses (salaries, administrative expenses, research and development, etc.) and secondary activity expenses such as interest paid on loans taxes. The result is a company’s net income. Net income at the end of a period becomes part of the shareholders’ equity feeding the balance sheet. Net income is also carried over to the cash flow statement When analyzing the income statement, you should be looking at the company’s profitability using key ratios like gross margin, operating margin, and net margin as well as tax ratio efficiency and interest coverage. The Cash Flow StatementA cash flow statement shows how much cash enters and leaves your business over a set period of time. It begins with the net income from the income statement and subtracts any non-cash expenses. The cash flow statement shows cash coming and going out of the business in three categories:
The cash flow statement shows the change in cash per period, as well as the beginning balance and ending balance of cash. Now that you have an overview of the three types of financial statements, let’s look at how they fit together to give you a really clear picture of the state of your business. This diagram from the Corporate Finance Institute does a good job of illustrating the similarities and differences between the three types of financial statements, and showing you where they intersect:
Learn more about how to read and understand financial statements in How to Read Financial Statements: A Guide for Business Owners. Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use. Which of the following financial statements provides a snapshot of a firm's financial position on a specific date?Balance sheet - reports a snapshot of asset, liability, and equity accounts at a specific point in time.
Which financial statement provides a snapshot?What is a balance sheet? The balance sheet is the cornerstone of a company's financial statements, providing a snapshot of its financial position at a certain point in time.
Which of the following financial statements is a snapshot of a company's financial status at an instant of time?The balance sheet is a snapshot of the company's financial standing at an instant in time. The balance sheet shows the company's financial position, what it owns (assets) and what it owes (liabilities and net worth).
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