What is a Financial Statement?

A financial statement in accounting is a written record that shows the monetary activities and performance of a company's financial position.¹ It details key information on what an organization owns and owes, as well as how much money it has made and spent.

Accountants and investors often audit financial statements for financing or investment purposes. Government agencies may also conduct audits of a business's financial health to ensure accuracy and regulatory compliance.

Read on to learn about the different types of audited financial statements, their purposes and how they are used—whether by organizations, governments or other stakeholders.

The four main types of financial statements in accounting are balance sheets, income statements, cash flow statements and statements of change in equity.

A balance sheet is an accounting statement of a company’s assets, liabilities and stockholders’ equity at a specific time and date.² It offers external and internal analysts an overview of how an organization performed during the previous period and how it expects to perform in the immediate future.

Items listed in a balance sheet include:

An asset is anything an organization owns that has some quantifiable value and could be liquidated and turned into cash.³ In other words, assets are a company’s resources. In accounting, assets can be categorized as short-term or long-term.

Short-term—or current—assets are the possessions an organization expects to convert into cash or use within a year, including cash and its equivalents, accounts receivable, prepaid expenses and inventory.

Long-term—or non-current—assets are resources an organization does not expect to convert imminently, such as land, patents, equipment, intellectual property and trademarks.

In contrast, a liability is anything an organization owes to a debtor.⁴ Like assets, liabilities can be categorized as short-term or long-term.

Short-term or current liabilities are debts due within one year, which may include wages, accounts payable and notes payable

Long-term or non-current liabilities are debts that an organization doesn’t expect to repay within a year, which may include loans, leases and bonds payable

The difference between an organization’s total assets and liabilities is also known as shareholders’ equity. This accounting statement shows the amount of money an organization owes that would be returned to shareholders if they were to liquidate all assets and pay off all debts.

Corporate accounting professionals and investors look for shareholders’ equity to establish how an organization uses and manages its initial investments and to determine the organization’s valuation.

A profit and loss statement, or income statement, is a financial document that shows an organization’s income, expenses and profit/loss over a particular period.⁵ The profit or loss is calculated by subtracting the operating expenses from all revenue streams.

Since income statements depict profits or losses, they show the profitability of an organization and give a glimpse into which business activities brought in revenue and which cost money. With such information, executives can identify areas of improvement, and investors can gain a better understanding of an organization’s financial health.

An income statement typically includes the following information:

• Revenue 
• Expenses
• Gross profits
• Cost of goods sold
• Operating incomes
• Income before taxes
• Earnings per share
• Net income
• Depreciation
• Earnings before interest, depreciation, taxes and amortization

A cash flow statement (CFS) is a financial report that details how different cash flows enter and leave an organization during a reporting period.⁶ Company stakeholders, business owners and managers use cash flow statements to understand their organizations’ value and overall health. That understanding guides and informs their financial decision-making.

A cash flow statement typically has three sections, showing the cash flow from operating, investing and financing activities.

Also known as the statement of shareholders’ equity or owners’ equity, a statement of change in equity is a document that shows the difference in an organization’s equity over a specific time.⁷ The statement of changes involves the following key components:

• Opening equity balance
• Comprehensive income
• Owner transactions
• Closing equity balance

The statement of change in equity is the least commonly used financial statement in accounting.

While each financial statement serves several roles for different stakeholders, as a group, the entire set of annual financial statements helps to shape the direction of an organization.

Financial statements indicate a company’s financial health. They serve as comprehensive report cards of a company’s financial performance. 

Since financial statements detail profitability and financial health over specific periods of time, stakeholders can use them to examine how well a company performs, gauge management efficacy and get an overview of the company’s stability and liquidity.⁸

Financial statements are critical for decision-making.⁹ Analysts and investors rely on a company's financial statements to evaluate the potential return on investment and assess the associated risks to make informed decisions to buy, hold or sell stocks.

Lenders and creditors use financial statements to determine the organization’s creditworthiness and ability to pay loans. Internally, managers use the information in financial statements to make strategic decisions, plan budgets, allocate resources and improve operational efficiency.

Organizations must prepare financial statements to comply with accounting standards such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). GAAP is a framework of accounting standards, rules and procedures used in the United States, while IFRS is a globally recognized set of accounting standards used in many other countries.¹⁰

These standards are essential for meeting regulatory requirements that help ensure transparency and consistency in financial reporting.

Financial statements are essential tools for strategic planning and control within an organization. Since they detail a comprehensive view of the company’s financial position, health and performance, executives can use them to make informed decisions and set the future direction for the company.¹¹

For instance, the income or statement of retained earnings often shows trends in revenue and expenses, allowing management to set targets for increasing sales and reducing costs. Regular analysis of financial statements also allows organizations to track their progress toward financial goals.

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