What Are Company Financial Statements? - Definition, Analysis & Examples

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  • 0:05 What Are Financial Statements?
  • 0:52 The Income Statement
  • 2:40 Statement of Retained Earnings
  • 3:20 The Balance Sheet
  • 5:28 Statement of Cash Flows
  • 7:58 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

In this lesson, you'll learn about the financial statements that a company must issue for the purpose of financial reporting. You'll learn what the statements are, what order they are prepared in, and what each statement includes.

What Are Financial Statements?

What exactly are financial statements? A company's financial statements are the reports that show the financial position of the company. There are four reports that fall into the category of financial statements. These reports, and the order in which they are prepared, are the following: the income statement, the statement of retained earnings, the balance sheet and the statement of cash flows.

Potential investors, potential financers, and those who already have a financial relationship with a company use the financial statements to help them see just how well the company is operating. Generally accepted accounting principles (GAAP) have set the standards for the manner in which each of these financial statements are reported. Let's look at each of these reports individually.

The Income Statement

The income statement is the report that measures the success of company operations during a given time period. Its purpose is to allow potential financers and investors to determine profitability, investment value and creditworthiness. This same group of individuals can use an income statement to evaluate the past performance of a company and compare it to competitors. They can also use the income statement to predict future performance and cash flows.

There are four key components of an income statement. They are: revenue, expenses, gains, and losses. Revenue is the cash inflow of the company. It is the money that is generated from the company's normal business operations. Expenses are the cash outflow of the company. They are the costs that are associated with earning revenue. Gains or losses occur when a company sells a company asset. If the sale produces more revenue than the asset is worth, a gain occurrs. If the sale produces less revenue that the asset is worth, a loss occurs. The total amount of net income, or profit, is figured by the following formula:

Net Income = (Total Revenues - Total Expenses) +/- Gains or Losses

Most companies also report earnings per share on their income statement. Earnings per share (EPS) are another indicator of a company's profitability. It signifies the amount of profit, or net income, that will go to each outstanding shareholder of common stock. The formula for earnings per share is:

Earnings per Share = Net Income - Dividends on Preferred Stock / Average Outstanding Shares

Statement of Retained Earnings

The statement of retained earnings is the statement that shows the retained earnings of the organization from the company's startup date until the balance sheet date. Retained earnings are the portion of net income that is retained for use by the company and not paid out to owners or investors. The total of retained earnings increase or decrease each reporting period based on the net profit or loss for the time period, as well as any dividends paid. The formula for figuring the ending retained earnings total is:

Retained Earnings = Beginning Retained Earnings +/- Net Income or Loss - Dividends Paid

The Balance Sheet

The balance sheet is the financial statement that reports the company's assets, liabilities, and stockholder's equity, sometimes also called owner's equity. This financial statement is reflective of the basic accounting equation that states:

Assets = Liabilities + Stockholders Equity

On the left side of the balance sheet, four categories of assets, or 'what we own,' are listed. They are as follows:

  1. The first category is current assets, which contains those items that the company plans on using up within a year. Examples include cash, accounts receivable, prepaid expenses, supplies, and inventory.

  2. The second category is investments:, which includes property, stocks, and bonds held by the company. Items such as buildings, land, and equipment owned by the company are included in this category.

  3. The third is intangible assets:, which includes trade names, patents, domain names, copyrights, and trademarks.

  4. The fourth is other assets. This category is reserved for assets that do not meet the criteria for the other classifications.

On the right side of the balance sheet are the liabilities, or 'what we owe.' The liabilities section is broken down into two categories:

  1. Current liabilities are items that are due and payable in the immediate future. Examples of current liabilities are accounts payable, wages payable, current portion of long-term debt, and interest payable.

  2. Long-term liabilities are items that are not payable within one year such as bonds payable and long-term notes payable.

On the right side and reported as the last section of the balance sheet is the area for reporting stockholder's equity. This is sometimes called owner's equity. In this area of the balance sheet, the amount of investment by owners and/or stockholders is reported. The total amount of owner's equity on the balance sheet is the difference between total assets and total liabilities. It is very important to note that the final totals on both sides of the balance sheet must be equal in order for the balance sheet to be accurate.

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