Chapter 6: Financial Statements

Financial statements are a formal record of the financial activities and position of a business, individual or entity. Creating financial statements is the second to last step in the accounting cycle, and if the previous steps have not been performed accurately, then the financial statements will also produce inaccurate data. As stated just above, a company uses financial statements to create a formalized record of the current financial position of a business, so that they may make the necessary changes or improvements to move forward and grow. 

Each business creates financial statements at the end of each accounting period, on an annual, quarterly, and many times, monthly basis. Not all companies work on the same annual accounting period. Some follow a calendar year, where they start on January 1st, and end their year on December 31st, while others follow a fiscal year. A fiscal year starts on the any date in the year, and ends exactly 12 months later. A company may choose a fiscal year because the bulk of their business does not run from January 1st-December 31st. For example, a school will follow a fiscal year, starting on August 1st and ending on July 31st. This makes sense for them because of how the school year falls. 

A business will break out their financial information into four types of statements: 

• • Balance Sheet

  • Income Statement

  • Statement of Cash Flows

  • Statement of Changes in Owner's Equity

The Income Statement reports the net income or the net loss of a business for a defined period of time. A company will pull the Revenue and Expense balances from the most recent trial balance ran. The underlying equation within the Income Statement is Revenue - Expenses = Net Income(or Net Loss), and is formatted as follows:

This report summarizes the changes in the owner’s capital account as a result of business transaction that occur during the period. In order to complete the Statement of Changes in OE, a business will first need to complete the Income Statement for the net income balance. The various figures used to complete these report cannot simply be found on the trial balance, but are pulled from various places. To understand more, here are the four parts of the Statement of Changes in OE:

A Balance Sheet reports the balances of a company's permanent accounts: assets, liabilities and owner's equity. It shows the financial position of a business at a specific period of time, displaying what a company owns, what it owes and what it's worth. A balance sheet is formatted as follows:

This statement is the summary of all the cash receipts and cash payments of a business for a specific period of time, and shows where your cash surplus/deficit lies, The statement of cash flows is meant to serve as a bridge between the minute detail of the profit and loss sheet, and the sketchy details of the balance sheet. When properly used, the statement of cash flows will fill in many gaps left in the reporting of information from one level of detail to the next.