If you're a small business owner, you may be thinking that your accountant is the only person who could possibly be interested in your business's financial statements.
But if you're looking for investors for your business, or want to apply for credit, you'll find that four types of financial statements—the balance sheet, the income statement, the cash flow statement, and the statement of owner's equity—can be crucial in helping you meet your financing goals.
Understanding financial statements
It's important for the small business owner to understand these four types of financial statements and the information they provide for the investor or creditor interested in providing funds for your business.
Both individually and taken together, these financial statements give a potential investor or creditor a wealth of information and can have a serious impact on your business's ability to obtain the funds or financing it needs.
1. Balance sheet
Also known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs.
Based on the basic accounting equation, or balance sheet equation [Assets = Liabilities + Equity], the balance sheet provides a snapshot of a business's assets, liabilities, and equity.
It also provides users with a look at the business's financial position at a specific point in time, and financial statement analysts use the information it contains to calculate several important financial ratios.
2. Income statement
The income statement is another important financial statement for your small business. It provides users with a picture of the business's financial performance over a specific period of time.
Also known as a statement of revenue and expense, or a profit and loss statement (P&L), the income statement is a statement of earnings that shows a business's operating and nonoperating revenue and expenses.
Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business's financial performance.
3. Cash flow statement
The cash flow statement, also known as a statement of cash flows, or a statement of changes in financial position, is an important financial statement that gives users an understanding of how well a business is managing its cash flow.
Using the information in a cash flow statement, users are able to see whether a business is generating sufficient cash to meet both its debt obligations and its operating expenses.
The typical cash flow statement format provides information about a business's cash from operating activities, cash from investing activities, and cash from financing activities.
4. Statement of owner's equity
The fourth financial statement that a business needs is a statement of owner's equity, also known as a statement of changes in equity, or a statement of shareholders' equity.
It shows the business's retained earnings—the profit kept, or retained, within a business rather than distributed to owners or shareholders—both at the beginning and at the end of a specific reporting period.
Retained earnings are often used to either reinvest in the company, or to pay off the business's debt obligations. It provides users with information regarding the financial health of a business, as it shows whether the business is capable of meeting ongoing financial and operating obligations without requiring its owners to contribute more capital.
By preparing each of these financial statements, not only will you be able to provide a prospective investor or creditor with important information that they need to assess your business, but also you will be able to identify trends in your business's performance that will help you to position your business for continued success.
You can work with your accounting professionals or engage an online service provider to help ensure that your business is compliant with its reporting and obligations throughout the year.
Find out more about Business Accounting
FAQs
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
What are the 4 financial statements of a company? ›
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
What are the 4 types of financial statements explain the purpose of each? ›
They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
What are the 4 general purpose financial statements and in what order are they prepared? ›
4 types of general purpose financial reporting
The four types of financial statements include Balance Sheet, Cash Flow Statement, Income Statement, and Retained Earnings Statement. Each report helps to identify any anomalies, inconsistencies, or trends that may require your attention.
Which of the 4 financial statements do you think is the most important and useful in predicting a company's success? ›
The balance sheet is particularly important as it provides a snapshot of a company's financial position at a specific moment in time, empowering a business owner or manager to establish the company's most important ratios such as solvency versus liquidity that are particularly important for debt management.
What are the 4 classification of financial statements? ›
There are four basic types of financial statements used to do this: income statements, balance sheets, statements of cash flow, and statements of owner equity.
What are the 4 parts of the financial statements? ›
Financial statements can be divided into four categories: balance sheets, income statements, cash flow statements, and equity statements.
What are the four types of financial transactions? ›
There are four main types of financial transactions that occur in a business. These four types of financial transactions are sales, purchases, receipts, and payments.
What are the four basic financial statements required by both IFRS and GAAP? ›
The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.
What are the four elements of financial statements identify and explain? ›
Elements of a balance sheet are assets, liabilities, and equity. Elements of an income statement are revenue and expenses. And elements of a cash flow statement are operating activities, investing activities and financing activities.
All four accounting financial statements accurately portray the company's overall financial situation. The income statement records all revenues and expenses. The balance sheet provides information about assets and liabilities. The cash flow statement shows how cash moves in and out of the business.
Which of the four financial statements should be prepared first? ›
The income statement should always be prepared before other statements because it provides an overview of the company's revenue and expenses during a specific period. This information is used in preparing other reports such as balance sheets and cash flow statements.
Why are the four financial statements vital for the decision making process? ›
Financial statements provide a snapshot of a corporation's financial health, giving insight into its performance, operations, and cash flow. Financial statements are essential since they provide information about a company's revenue, expenses, profitability, and debt.
What are the 4 most common financial statements? ›
There are four primary types of financial statements:
- Balance sheets.
- Income statements.
- Cash flow statements.
- Statements of shareholders' equity.
The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues, and costs, as well as its cash flows from operating, investing, and financing activities.
What financial reports do businesses need? ›
Here's why these five financial documents are essential to your small business. The five key documents include your profit and loss statement, balance sheet, cash-flow statement, tax return, and aging reports.
What are the 4 pieces of financial information contained in the income statement? ›
The income statement presents revenue, expenses, and net income. The components of the income statement include: revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non-operating income and expenses; gains and losses; non-recurring items; net income; and EPS.
Are there 3 or 4 financial statements? ›
For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity.
What are the 3 main financial statements that companies should have? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
