lass Notes: Introduction to Financial Statements
Overview
Financial statements are formal records that summarize a company’s
financial performance and position. There are four primary types of
financial statements:
1. Income Statement (Profit and Loss Statement)
Purpose: Measures profitability over a period.
Key Components:
o Revenues: Income generated from operations.
o Expenses: Costs incurred in generating revenue.
o Net Income: Revenues - Expenses.
Example:
If revenues are $50,000 and expenses are $30,000, the net income is
$20,000.
2. Balance Sheet (Statement of Financial Position)
Purpose: Shows a company’s financial position at a specific point in
time.
Key Components:
o Assets: Resources owned (e.g., cash, inventory).
o Liabilities: Obligations owed (e.g., loans, accounts payable).
o Equity: Owner’s claims (e.g., retained earnings).
Accounting Equation:
Assets = Liabilities + Equity
3. Cash Flow Statement
Purpose: Tracks cash inflows and outflows over a period.
Key Components:
o Operating Activities: Cash from core business operations.
o Investing Activities: Cash used for or generated by
investments.
o Financing Activities: Cash from debt and equity
transactions.
Example:
Cash inflow from sales is $25,000, and cash outflow for equipment
purchase is $10,000. Net cash flow is $15,000.
4. Statement of Changes in Equity
Purpose: Details changes in owners' equity during a period.
Key Components:
o Retained Earnings: Profits reinvested in the business.
o Dividends: Distributions to shareholders.
o Other Equity Adjustments: E.g., revaluation reserves.
Quick Tip
Always review the relationship between the financial statements:
Net Income from the income statement links to retained
earnings on the balance sheet.
Ending Cash on the cash flow statement matches the cash account
on the balance sheet.
