Financial Statements Definition & Its Types

What are Financial Statements?

Financial statements represent financial results of an organization which is published at the end of the financial year. These are written records that measures  financial position, health & performance of a company can be shown at the end of a particular time period. Financial statements are prepared by company's management.

Types of Financial Statements

Generally, there are three types of financial statements of a company. These are

(i) Income statement

Income statement, also known as profit & loss statement reflects the company's financial performance in terms of net profit or net loss at the end of a particular time period & it also includes trading account.

The Income statement gives an overview of sales, expenses & net income of a company. 

The income statement consists of the following two components:

(a) Revenue: 

what the company earned from its main operations and other income( Interest earned, dividend etc.) over a period.

(b) Expenses: 

The cost incurred by the business or organization over a period(electricity bill, salary, inventory cost etc.)

And after deducting revenue from expenses get net profit or net loss which most of shareholders wanna analyze.

(ii) Balance Sheet

Balance Sheet, also known as Financial Position Statements that shows the position of assets, liabilities and shareholder's equity at the end of a particular time period.

Balance sheet can be classified into following three categories. 

(a) Asset: 

An assets is any resource, owned by the entity, which is capable of generating future cash flows like land, machinery etc.

(b) Liability:

Liabilities are mandatory obligations of an entity which are required to be paid off using an assets like bank loan.

(c) Shareholder's Equity:

Shareholder's equity is the balance sheet value of shareholder's interest in the company. Shareholder's equity means owner of the company.

(iii) Cash Flow Statement

Cash flow statement is an important part of financial statements of the company which tracks the flow of cash from various sources throughout the year. It helps the identify liquidity of the company. 

Cash flow statement are classified into following three categories.

(a) Operating Activities:

It shows the cash generated from the main activity in which the company is involved.

(b) Investing Activities:

It represents the cash inflows and out flows related purchasing and selling of fixed assets of a company. 

(c) Financing Activities:

It shows cash flows which are used in financing the business like loan repayment, rising share capital, dividend paid etc.

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