A financial statement summarizes key information about the financial health, success, and profitability about a particular company. The financial figures in a financial statement also provide a measure of the success or failure of its current management and business strategies. Financial statements are generally divided into four distinct parts: a balance sheet, income statement, statement of stockholder equity, and statement of cash flows.
The Balance Sheet
The balance sheet is a snapshot of the financial health of a company at a given point in time. Depending on how a company tracks financial records, a balance sheet is commonly created every three months, or at the end every quarter. A typical balance sheet generally summarizes three financial components: assets, liabilities, and owner's (or stockholder's) equity. From the balance sheet you can determine if a company is making money by subtracting liabilities from assets. This difference is the net worth of the company.
The Income Statement
The income statement, also called an earnings statement, measures whether company operations were profitable. The measurement of profitability is determined by revenue, expenses, net profit or loss, and the net profit or loss per share of ownership. By measuring how revenue is used in company operations, you can determine if the company is making money. In addition, the income statement represents an entire accounting period of time whereas the balance sheet is only a specific point in time.
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Statement of Stockholder Equity
A statement of stockholder equity reconciles beginning and ending balances of both stockholder equity and the retained earnings accounts. A typical statement of stockholder equity commonly includes several years of data to reflect balance changes from year to year. Stockholder equity and retained earnings are also components of the balance sheet, which eases reconciliation in the statement of stockholder equity.
Statement of Cash Flows
The statement of cash flows summarizes the money generated by business activities and the money spent by the business. Specifically, the cash flows statement illustrates the money that comes in and out from every source including cash from operations, investments, interest payments, financing, debt service, and expenses.