What is the name of the financial report that tells you the financial position of the company?

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• Financial statements help you analyze your company’s financial position and performance.
• They are comprised of four main components, of which the balance sheet and income statement are essential.
• Ascertain whether financial statements have been prepared for external or internal use.
• The balance sheet shows “what do we have.”
• The income statement shows “what did we do.”

External financial statements

External financial statements are issued for external reporting purposes. They are for investors, tax authorities or other significant partners who require financial information. External financial statements are normally produced on an annual basis, although in some cases (including for public companies) they are produced quarterly. To ensure comparability and consistency, external financial statements are usually based on Generally Accepted Accounting Principles (GAAP), which has specific requirements that must be followed.

Internal financial statements

Internal financial statements are more flexible than external financial statements and have a higher analytical component. They may report by division, have more detail or be produced on a more frequent basis (weekly, monthly or quarterly).

A set of financial statements includes two essential statements: The balance sheet and the income statement

A set of financial statements is comprised of several statements, some of which are optional. If the statements are prepared or reported by an external accountant, they will begin with a report from the accountant. This will be followed by the two essential financial statements:

• The balance sheet (sometimes also known as a statement of financial position)
• The income statement (which may include the statement of retained earnings or it may be included as a separate statement)

The balance sheet and the income statement are usually followed by the cash flow statement and notes to the financial statements.

Generally, external financial statements are prepared on the accrual basis of accounting, which means that assets and liabilities are recorded when they are committed to, and revenue and expenses are recorded when they are incurred (rather than when they are actually paid). 

Balance sheet

The balance sheet is the critical “what do we have” statement. The balance sheet shows what the company owns (assets such as cash, accounts receivable and equipment) and what the company owes (liabilities such as accounts payable and loans). Any remaining difference between these two amounts (the assets and the liabilities) shows what belongs to the owners as their equity interest. These three amounts should always be in balance (see the fundamental accounting equation). The balance sheet presents a picture of where the company is at a certain point in time.

Income statement (profit and loss statement)

The income statement is the “what did we do” statement. The income statement, or profit and loss statement, shows how the company performed during the course of its operations for a fixed period of time. It accumulates information over a set period (typically annually, monthly or quarterly). Key elements of the income statement include revenue and expenses. Combined, these numbers yield the net income (or loss).

Statement of retained earnings

The statement of retained earnings is a measure of the assets of your operation that have been generated through profitable activity, retained in your business and not paid out to shareholders as dividends. Generally, a large amount of retained earnings is regarded as a sign that the company has done well and is reinvesting its profits in itself. That said, a startup or early-stage business often faces reporting negative retained earnings as it takes time to build a business and become profitable.

Cash flow statement

The cash flow statement shows the sources and uses of cash for a fixed period of time. The cash flow statement informs investors and creditors about the solvency of your business, where the business is receiving its cash from, and on what it is spending its cash.

Accountant’s report

When an external accountant prepares or reports on the financial statements, an accountant’s report will need to be included with the financial statements. This report tells you how much scrutiny has been applied to the financial statements and if they deviate from GAAP in any way.

Notes to the financial statements

In Canada, businesses can select the accounting standard on which to base their financial statements. The notes to the financial statements tell readers what policy choices have been made, as well as other information that can be vital to a complete understanding of the financial statements.

Summary: Financial statements have four main components (the balance sheet and income statement are essential) and help you analyze your company’s financial position and performance.

Read next: Reading a financial statement: The balance sheet (assets, liabilities and equity)

Overview of the Three Financial Statements

1. Income Statement

Often, the first place an investor or analyst will look is the income statement. The income statement shows the performance of the business throughout each period, displaying sales revenue at the very top. The statement then deducts the cost of goods sold (COGS) to find gross profit.

From there, gross profit is impacted by other operating expenses and income, depending on the nature of the business, to reach net income at the bottom – “the bottom line” for the business.

Key features:

• Shows the revenues and expenses of a business
• Expressed over a period of time (i.e., 1 year, 1 quarter, Year-to-Date, etc.)
• Uses accounting principles such as matching and accruals to represent figures (not presented on a cash basis)
• Used to assess profitability

2. Balance Sheet

The balance sheet displays the company’s assets, liabilities, and shareholders’ equity at a point in time. The two sides of the balance sheet must balance: assets must equal liabilities plus equity. The asset section begins with cash and equivalents, which should equal the balance found at the end of the cash flow statement.

The balance sheet then displays the ending balance in each major account from period to period. Net income from the income statement flows into the balance sheet as a change in retained earnings (adjusted for payment of dividends).

Key features:

• Shows the financial position of a business
• Expressed as a “snapshot” or financial picture of the company at a specified point in time (i.e., as of December 31, 2017)
• Has three sections: assets, liabilities, and shareholders equity
• Assets = Liabilities + Shareholders Equity

3. Cash Flow Statement

The cash flow statement then takes net income and adjusts it for any non-cash expenses. Then cash inflows and outflows are calculated using changes in the balance sheet. The cash flow statement displays the change in cash per period, as well as the beginning and ending balance of cash.

Key features:

• Shows the increases and decreases in cash
• Expressed over a period of time (i.e., 1 year, 1 quarter, Year-to-Date, etc.)
• Undoes accrual accounting principles to show pure cash movements
• Has three sections: cash from operations, cash used in investing and cash from financing
• Shows the net change in the cash balance from the start to the end of the period

How are These 3 Core Statements Used in Financial Modeling?

As explained above, each of the three financial statements has an interplay of information. Financial models use the trends in the relationship of information within these statements, as well as the trend between periods in historical data to forecast future performance.

The preparation and presentation of this information can become quite complicated. In general, however, the following steps are followed to create a financial model.

• Line items for each of the core statements are created. It provides the overall format and skeleton that the financial model will follow
• Historical numbers are placed in each of the line items
• At this point, the creator of the model will often check to make sure that each of the core statements reconciles with the data in the other. For example, the ending balance of cash calculated in the cash flow statement must equal the cash account in the balance sheet
• An assumptions section is prepared within the sheet to analyze the trend in each line item of the core statements between periods
• Assumptions from existing historical data are then used to create forecasted assumptions for the same line items
• The forecasted section of each core statement will use the forecasted assumptions to populate values for each line item. Since the analyst or user has analyzed past trends in creating the forecasted assumptions, the populated values should follow historical trends
• Supporting schedules are used to calculate more complex line items. For example, the debt schedule is used to calculate interest expense and the balance of debt items. The depreciation and amortization schedule is used to calculate depreciation expense and the balance of long-term fixed assets. These values will flow into the three main statements

More Resources

We hope this has been a helpful overview for you of the 3 financial statements. Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To continue learning, explore these additional CFI resources: