What are Financial Statements?

What are financial statements? What do they mean? Why do they matter? Do you sometimes find yourself asking these questions? Well, you are in the right spot. Let's take a high level look at the three primary financial statements and how they are correlated.

The balance sheet, income statement and cash flow statement are the three primary financial statements you will find with most any “for-profit” business. These statements offer three perspectives on a company’s financial performance. They tell three different but related stories about how well, or not so well, your company is performing financially.

The balance sheet shows a company’s financial position at a specific point in time. It provides a snapshot of assets, liabilities, and equity on a given day. For example, at the end of the day, on December 31, 2016, my company owned, X, Y and Z. It is called a “Balance” Sheet because Assets = Liabilities + Equity.

The income statement shows the bottom line. It indicates how much profit or loss was generated over a period of time – usually a month, a quarter, or a year. For example, For the year ended December 31, 2016, would be a type of heading used on the income statement, not just as of the day as you saw above in the balance sheet. The Income Statement is generally comprised of 4 major sections; Revenues or Sales, Cost of Goods Sold, Overhead and Other.

The final statement is the cash flow statement. This statement tells where the company’s cash came from and where it went. It shows the relationship between net profit and the change in cash recorded from one balance sheet period to the next. This statement has three sections

Together, these financial statements can vastly improve your knowledge and understanding of what is going on in your company or in any other business you are researching.

Thank you for reading this far! :)

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