Four Basic Financial Statements

Four Basic Financial Statements

Many businesses use a simple method for understanding the well-being of their companies' financial income called the four basic financial statements. This method is simple to understand and to follow so a company can see where their money came from, where it is now, and a financial estimate of future income. The four basic financial statements are balance sheets, income statements, cash flow statements and statements of shareholders equity.

Balance sheets are used to give the company a clear view of what their assets are. The assets of a business are any valuable belongings or money that determines a business's value. They are determined by a simple equation of Assets = Liabilities and Shareholders' Equity. In other words a company's liabilities and shareholders' equity can determine the assets of a company which determines the success of the company and makes it necessary to keep track of; making balance sheets very important to a single business.

Income statements are a report to show investors and managers how much money their business made or lost during any period of time. These reports can be accessed for any length of time, most commonly by monthly, quarterly, or yearly. This makes it easy to see how much money is taken in before expenses and after expenses to give the total profit, making it easy for a company to see where they could cut cost or have extra money to invest and grow their business.

Cash flow statements are similar to income statements but a little more advanced. These statements can show the changes a company has made over time. Showing a business not just how much they made but in comparison to previous statements. For example if a company sold and made a profit during a holiday season a cash flow statement can show more precisely where sales increased or decreased. This could become helpful when a business needs to know how much merchandise their business should order. This highlights cash flow from three types of activities, operating, investing, and financing activities. Operating activities is the first part of the cash flow statements which shows the company's net income and/or losses. The second part of cash flow statement is investing activities which shows the company's investments including machinery, property or something of value that a company either uses cash to invest or can sell to retain cash. Finally the last part of the cash flow statement is financing activities. This portion shows the money that was borrowed from banks or by selling stocks and loans also including paying back bank loans or retaining more stocks would also show on this portion of the statement.

Statements of shareholders equity shows the money the company received from outside sources such as investors and stock holders. This is usually the last portion of the balance sheet which breaks down into