Financial Statements

An income statement is a financial statement that shows the performance of a business and how the revenue earned becomes the net income. It shows the revenues earned minus the cost and expenses for a specific period of time. The income statement is generated to show managers, owners and investors if the company has made or lost money during the specific period of time being reported. Income statements are also known as profit and loss statement (P&L), revenue statement or operating statement.

The statement of retained earnings is a financial statement that shows the way the net income and the distribution of dividends changed the business's financial position during that specific period of time. When net income is earned it increases the balance of retained earnings and shows the relationship between the income statement and the balance sheet. The statement breaks down changes in the stakeholders' shares in the business, and the retained profit or loss from one time period to the next. Retained Earnings equation is as follows: Ending Retained Earnings = Beginning Retained Earnings − Dividends Paid + Net Income.

The balance sheet is also known as statement of financial position and it shows the financial balances of a company. Assets, liabilities and ownership equity are listed as of a specific date; this can be monthly, quarterly or yearly. Balance sheets are presented with assets on one side and liabilities and net worth on the other side with the two sides balancing at the bottom. A balance sheet is often referred to as a snapshot of a company's financial condition. The balance sheets formats were established by Generally Accepted Accounting Principles (GAAP). This format is required by all companies, large or small, so anyone can read the balance sheet and understand it.

The cash flow statement is a financial statement that shows how changes in the balance sheet accounts and income change the cash flow in and out of the business. The cash flow statement breaks down the operating, investing, and financing activities. The cash flow statement shows both the current operating performance and the changes in the balance sheet. As an analytical tool, the cash flows statement is useful in determining the short-term viability of a company, particularly its ability to pay bills.

All companies should prepare financial statements as it is a tool to show the financial performance of a company. They are used for both internal and external purposes for making decisions. Owners and board of directors need them to see how the company is performing. Managers can use them to control costs as well as set goals for planning the future with forecasting or budgeting. A company can use the income statement for prospective investors, creditors and suppliers.