Four Types of Financial Statements That Every Business Needs

Financial statements are a rich source of information about an organization’s financial health. Analyzing these financial reports helps stakeholders—from owners to investors, lenders and managers—in decision-making. Additionally, for-profit companies in the U.S. prepare financial statements in compliance with the Generally Accepted Accounting Principles.¹

Read on to learn the four basic financial statements that every business needs to drive success.

Essential financial statements convey financial information about a company, including its business activities and performance.² They are scorecards for effective organizational management.

Below are the four vital financial statements for business.

An income statement tells you how much revenue a company has earned over time, monthly, quarterly or annually. Income statements also show the earnings per share (EPS), or the amount stakeholders would receive if the company distributed all its net profits for a particular accounting period.³

Income statements let you assess an organization’s profitability and operational efficiency, making them invaluable to stakeholders. Business owners rely on income statements to make better expenditure decisions, and investors use them to assess a company’s worth.

Income statements may vary, but most display certain main components:

Operating revenue comes from a company’s core activities, including selling products and services. Non-operational revenue comes from non-core functions, such as property rental income and interest earned on bank savings.

Expenses

Primary expenses are incurred during core activities and include general and administrative expenses, cost of goods sold (COGS), depreciation or amortization, and research and development costs. Secondary expenses occur during non-core activities and include interest paid on loans, debt and losses from sold properties.

Gains and Losses

Gains represent the money (or sundry income) earned from sources other than normal operations, such as selling a company’s assets.⁴ Losses originate from unusual activities like lawsuits, selling old assets or on-time business activities. Not all financial statements show a profit and loss statement with both gains and losses.

Net Income

The net income is the final piece of the income statement, summing up the rest. It shows a company’s total profit or loss after accounting for all revenue, all operating expenses and, gains and losses:

Net Income = (Revenue + Gains) - (Expenses + Losses)

A balance sheet reveals a company’s full financial position and standing at a specific date, typically at the end of a fiscal year. It gives an overview of what the company owns and owes.⁵ Examining and comparing balance sheets of different time periods allow stakeholders to determine an organization’s financial health.

Balance sheets explore the company’s assets, liabilities, and equity:

Assets of company properties are listed according to their liquidity. Current assets like cash flow and cash equivalents appear first, as they can be converted into cash within a year. Then follow non-current assets such as equipment, trademarks and long-term investments.

Liabilities represent what a company owes outsiders, and are listed in order of their due dates. Current liabilities are due within a year and include money owed to suppliers, employee wages and loan and tax payments. Non-current liabilities are due after one year and include long-term loan and interest payments, pension fund and deferred tax liabilities.

Equity is the money attributed to a business owner or shareholders. Equity includes invested capital, retained earnings and private or public company stocks.

A cash flow statement shows how money moves in and out of a business over a particular time period. It reveals the company’s financial footing—whether it can remain solvent or is at risk of bankruptcy.

This is an essential company financial statement that complements the balance sheet and income statement. For instance, since the income statement is based on accrued accounting, it doesn’t record when money leaves or enters the company as accounts payable. The cash flow statement bridges this gap by showing the actual amount you have on hand.⁶

Cash flow statements cover operating, investing and financing activities:

Operating activities represent the cash generated or spent in a company’s normal operations, like selling products or services as well as paying employees’ salaries, debts and income taxes.

Investing activities encompass money earned or spent on your company’s investments. Cash flows out of the company when you buy property or equipment but flows in when you sell an asset.

Finally, financing activities represent the money you earn or spend financing your company, including capital, cash from investors and bank loans.

The statement of shareholders’ equity conveys the value of each stakeholder’s share or ownership of a company.⁷ It is part of the balance sheet, where equity is calculated as the total assets minus total liabilities. Therefore, it is one of the corporate financial statements determining an organization’s general financial health.⁸

Recording the changes in equity over a specific time period—for example, one year—gives a clear picture of the earnings that remain in the business. If the ending equity balance is positive, a company has enough assets to pay off its liability. However, a negative equity balance means a company could run into bankruptcy.

The key components of a statement of shareholders’ equity include:

• Share capital: The capital a business raises from issuing common or preferred stock (or shares)⁹
• Retained earnings: Accumulated earnings that have not been distributed to shareholders, which the company can use in future investments to boost its profitability
• Dividends: Payments from retained earnings that a company pays to shareholders or investors who hold a company’s stocks
• Net income: The amount that remains after subtracting all deductions and expenses from the net profit

Financial statements can be used to help companies gain additional funding, as well as to guide a company's financial position, policy and planning.

Investors considering whether a company's financial health and business are worth investing in will evaluate the income and cash flow statements, considering the company’s stability and profitability. Balance sheets and income statements show banks and other lenders whether a company can meet its debt obligations. Financial statements of shareholders’ equity inform owners of the worth of their businesses when seeking funding.

Balance sheets not only help lenders decide whether a company is a sound investment, but they can also help business owners identify and control potential financial risks, such as huge debts and bankruptcy risks.¹⁰ Business owners also rely on cash flow statements and cash accounts to help them make wiser expenditure decisions to meet their objectives.¹¹

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