The Four Financial Statements

The Four Basic Financial Statements

The Balance sheet, Income Statement, Retained Earnings Statement, and Statement of Cash flows are the four basic financial statements used in accounting. They contain a company's assets, liabilities, expenses, and revenues in a format that internal and external users like investors, managers, creditors, and employees can use to analyze and assess the financing, investing, and operating activities of a company.

The Income Statement

Accounting uses the income statement to report a company's net income or net loss for a period of time. It does this by subtracting the company's expenses from its revenues. If the company's expenses are less than its revenues it will report a net income. If its expenses are more than its revenues, it reports a net loss. The income statement is useful to investor's because they belief it provides useful information that they can use to predict the future success or failure of a company's performance. Investors are more likely to buy a company's stock (invest in it) if they belief that a future successful performance will increase the company's stock value. Banks also use this information to predict the likelihood that a company will repay a loan.

Retained Earnings Statement

Accounting uses the retained earnings statement to show the amounts and causes of changes in a company's retained earnings during a specific period. The net income retained is a company's retained earnings. It does this by adding any retained earnings from previous periods to the difference between the current net income and the amount of dividends paid during the same period. Financial statement users can evaluate the dividend payment practices of a company by looking at the retained earnings statement. Investors can choose from dividend paying companies or non-dividend paying ones. Lenders like banks, use the retained earnings statement to monitor dividend payments because any money paid in dividends reduces a company's ability to repay its debts.

The Balance Sheet

Accounting uses the balance sheet to report a company's assets and claims to assets for a specific period of time. Claims to assets are sub-divided into Liabilities (claims of creditors) and stockholder's equity (claims of owners). The balance sheet gets its name from the fact that assets are equal to the sum of liabilities and stockholder's equity: assets=liabilities + stockholder's equity. This equation is known as the basic accounting equation. Creditors use the information contained in a company's balance sheet to assess the company's likelihood to pay its debts. Creditors also evaluate a company's debt to stockholder's equity to determine if a company has satisfactory proportion of debt