What’s a financial statement?

Company financial statements are written records of business activities and results. Government authorities, accountants, businesses, etc., audit financial accounts for accuracy, tax, financing, and investment objectives. The balance sheet, income, cash flow, and equity statements are vital for-profit financial statements. Nonprofits employ comparable but distinct financial statements.

Knowing Financial Statements

Investors and analysts use financial data to evaluate a firm and anticipate its stock price. A key source of audited financial data is the annual report, which includes the firm’s financial statements.

Financial statements let investors, analysts, and creditors assess a company’s financial health and profit potential. The main financial statements are the balance sheet, income statement, and cash flow statement.

Not all financial statements are alike. Corporations in the U.S. employ generally accepted accounting principles, whereas overseas corporations use overseas financial reporting standards. Additionally, U.S. government departments have various financial reporting regulations.

The Balance Sheet

The balance sheet shows a company’s assets, liabilities, and shareholders’ equity. The balance sheet’s top date indicates the snapshot’s date, usually the reporting period’s end. Balance sheet elements are listed below.

Assets

• Liquid assets such as Treasury bills and certificates of deposit are considered cash and cash equivalents.
• Customers owe the firm money to sell products and services, known as accounts receivable.
• The products a corporation keeps to sell are its inventory. Inventory might contain finished commodities, unfinished work, and raw resources.
• Prepaid expenditures are prepaid bills. These costs are recorded as assets since their worth has not yet been recognized; if the benefit is not realized, the corporation might get a refund.
• Company capital assets include property, plants, and equipment for long-term use. This comprises manufacturing structures and heavy gear for raw material processing.
• Investments are speculative growth assets. These are owned for capital appreciation, not activities.
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• Trademarks, patents, goodwill, and other intangible assets help the firm financially in the future but can’t be touched.

Liabilities

• A business’s accounts payable are its regular bills. Utility expenditures, rent, and raw material purchases are included.
• Wages are staff remuneration for time worked.
• Notes payable document official debt arrangements, including payment schedules and amounts.
• Dividends payable refer to declared but unpaid dividends to shareholders.
• Long-term debt includes sinking bond funds, mortgages, and debts due in over a year. This debt’s short-term element is a current obligation.

Shareholder Equity

• Shareholders’ equity is a company’s assets less its liabilities. Shareholders’ equity (sometimes called stockholders’ equity) is the money given to shareholders if all assets are liquidated and debt is paid off.
• Shareholder equity includes retained earnings and net earnings not distributed as dividends.

Example of Balance Sheet

ExxonMobil Corporation’s (XOM) fiscal year 2021 balance sheet, as of December 31, 2021, is provided below.

• The total assets were $338.9 billion.
• Total liabilities totaled $163.2 billion.
• The total equity was $175.7 billion.
• The entire liabilities and equity for the time were $338.9 billion, matching the total assets.

The Income Statement

Unlike the balance sheet, the income statement spans a year for yearly financial reports and a quarter for quarterly ones. The income statement shows net income, revenues, costs, and earnings per share.

Revenue

Operating revenue comes from product or service sales. Operating revenue for auto manufacturers comes from producing and selling cars. Companies pay operating revenue from their primary business.

Non-operating revenue refers to money from non-essential company activity. The business’s primary purpose is not to generate income. Examples of non-operating revenue:

• Bank cash interest
• Rental revenue from property
• Revenue from strategic alliances, such as royalty payments
• Company property advertisement display revenue

Other money comes from other sources. Selling long-term assets like property, automobiles, or a subsidiary might provide additional revenue.

Expenses

Earning money from the business’s primary activity incurs critical expenditures. Expenses encompass COGS, SG&A, depreciation/amortization, and R&D.

Wages, sales commissions, power, and transportation are typical expenditures.

Loan or debt interest is a secondary activity expense. Asset sales losses are costs.

The income statement primarily conveys corporate activities’ profitability and financial outcomes, but it may also demonstrate sales or revenue growth across numerous periods.

Investors might also assess a company’s expense management to determine if lowering sales costs would increase profits and the income statement.

ExxonMobil Corporation’s fiscal year 2021 income statement, as of December 31, 2021, is provided below.

• Total sales were $276.7 billion.
• The total cost was $254.4 billion.
• Profit, or net income, was $23 billion.

Cashflow Statement

The cash flow statement (CFS) evaluates a company’s ability to generate cash for debt payments, operational expenditures, and investments. The cash flow statement supports the balance sheet and income statement.

The CFS helps investors understand a company’s activities, funding sources, and spending habits. The CFS also indicates a company’s financial health.

No formula exists for cash flow statements. Instead, three parts show cash flow for a company’s cash-using operations. The three CFS components are below.

Operating Activities

Operating activities on the CFS encompass cash flows from business operations and sales. Cash comprises accounts receivable, depreciation, inventory, and accounts payable changes. These transactions include wages, income tax, interest, rent, and sales proceeds.

Inventory Activities

Investment operations involve utilizing funds from a company’s investments for its long-term future. This category includes asset sales, vendor and customer loans, and merger and acquisition payments.

Fixed asset acquisitions, including PPE, are also included in this section. Changes in equipment, assets, or investments affect investment cash.

Financial Activities

Financing operations involve funds from investors, banks, and shareholder payments. Finance operations include debt, equity, stock repurchases, loans, dividends, and debt repayments.

The cash flow statement reconciles three primary company operations’ income and balance sheets.

Cash Flow Statement Example

As of December 31, 2021, ExxonMobil Corporation’s fiscal year 2021 cash flow statement is below. We can observe the cash flow statement’s three regions and outcomes.

• Cash flow from operating operations was $48 billion positive.
• Investing activities resulted in a $10.1 billion cash outflow. Most cash outflows were for property, plant, and equipment additions; therefore, the corporation invested in new fixed assets.
• The financing operations resulted in a negative cash flow of $35.4 billion. Short-term debt reductions and dividends accounted for most cash outflows.

Shareholder Equity Changes Statement

The equity statement serves the purpose of monitoring and documenting the aggregate equity. The concluding value stated in the equity statement adjustment aligns with the aggregate equity value shown in the balance sheet for the same period.

Changes to shareholder equity vary per firm but usually include two components:

• Beginning equity is the equity from the previous period that rolls into the next.
• At a particular time, the firm made net income. The corporation automatically recognizes operating income as equity and rolls it into retained earnings at year-end.
• Dividends: earnings are distributed to shareholders. A corporation may distribute sure profits to investors instead of retaining all of them.
• The change in other comprehensive income from period to period is shown as (+/-). This statistic may increase or decrease equity, depending on transactions.

ExxonMobil’s statement of changes in equity includes acquisitions, dispositions, stock-based award amortization, and other financial activities. This data helps evaluate how much money the corporation keeps for growth rather than distribution.

Comprehensive Income Statement

Often overlooked, a statement of comprehensive income covers net income and other broad income changes. Unreported profits and losses are included in the total income. This financial statement illustrates a company’s income change, including unrecorded profits and losses.

Transactions on the comprehensive income statement include:

• Net income (income statement)
• Unrealized debt securities gains and losses
• Unrealized derivative gains and losses
• Unrealized foreign currency translation adjustments
• Retirement program unrealized gains or losses

Nonprofit Financial Reports

Nonprofit organizations use standardized financial statements to track transactions. Financial statements differ between for-profit and charity entities due to their variances. Nonprofit financial statements often include:

• The Statement of Financial Position is a balance statement from a for-profit corporation. The most significant distinction is that nonprofits don’t have equity positions; “net assets” remain balanced after eliminating assets and liabilities.
• The Statement of Activities is similar to a for-profit entity’s revenue statement. This report records operational changes, including contributions, grants, event money, and costs to make things happen.
• The Statement of Functional Expenses applies only to non-profit organizations—the statement of functional costs lists administrative, program, and fundraising expenses per entity function. The public receives this information to show how much firm spending is mission-related.
• The Statement of Cash Flow is similar to a for-profit entity’s statement. The accounts may change as a nonprofit, but the report is still separated into operating, investing, and financing operations.

An external auditor evaluates an entity’s financial accounts for compliance with accounting standards and for any significant misstatements that might affect results.

Financial Statement Limitations

Although financial statements give a lot of firm information, they have limits. The statements are susceptible to interpretation. Thus, investors often draw diverse conclusions about a company’s financial success.

For instance, investors may prioritize stock repurchases or invest in long-term assets. A company’s debt level may bother one investor but not another.

When evaluating financial accounts, compare different periods to find trends and compare the company’s results to its industry counterparts.

Finally, financial statements are only as reliable as their data. Fraudulent economic activities or insufficient control and supervision have caused financial statements to deceive users. Even with certified financial accounts, users must believe the report and data.

The Main Financial Statement Types?

The primary financial statements are balance sheets, income statements, and cash flow statements. These three statements indicate a company’s assets, liabilities, revenues, costs, operating, investing, and financing cash flows.

What are the financial statements’ main items?

Everyday statement line items include taxes, cash, marketable securities, inventory, short-term and long-term debt, accounts receivable and payable, and cash flows from investing, operating, and financing activities. These items are different for each company.

What Are Financial Statements Benefits?

Financial statements demonstrate corporate operations. It shows how a firm produces income, its cost of doing business, how well it manages cash, and its assets and liabilities. Financial statements reveal a company’s management performance.

How do I read financial statements?

Financial statements are read in numerous ways. To comprehend changes over time, compare financial statements to past periods. Comparative income statements show a company’s income last year and this year. The year-over-year change shows a company’s health in its financial statements.

Reading financial statements involves comparing performance to rivals or industry peers. Financial statements may help analysts determine which firms are leading the sector and which are falling behind.

What’s GAAP?

US corporations must generate financial statements using GAAP. It specifies how to record transactions, when to recognize income, and when to recognize costs. IFRS offers a comparable but distinct set of requirements for international firms.

Bottom Line

Financial statements allow external examination of a company’s performance. The balance sheet shows a company’s liquidity and solvency, whereas the income statement shows its profitability. A cash flow statement links these two by documenting cash sources and uses. Financial statements show a company’s performance over time and against rivals.

Conclusion

• Financial statements document an entity’s commercial and financial performance.
• In a snapshot, balance sheets show assets, liabilities, and shareholders’ equity.
• The income statement emphasizes a company’s revenue and costs. A company’s net income is calculated by subtracting expenditures from revenues.
• The cash flow statement (CFS) evaluates a company’s ability to generate cash for debt payments, operational expenditures, and investments.
• The statement of changes in equity shows how a corporation retains earnings for expansion or distributes them.