Companies must produce a series of financial statements to provide information on their activities, net worth and viability. There are three main financial statements maintained by companies and each one plays a different role. Investors, lenders and shareholders are interested in the financial statements, as are the owners and members of the administration.
The balance sheet shows the assets, liabilities and equity of a company. The balance sheets do not list daily income and expenses, but rather detail the results of these activities. Assets and liabilities are classified as first or long-term flows. Current assets and liabilities are expected to be consumed or paid within a year, while long-term assets and liabilities go beyond one year. The assets and liabilities are listed below in order of liquidity, which means that the items that can be liquidated first, figure first. Investors and lenders use liquidity information to determine a company’s ability to pay off debt. Finally, the company’s capital position shows the balance sheet of the company’s net worth.
Statement of income
The income statement is also known as a profit and loss statement. This statement shows all the income and expenses of a company operating and investing activities. The income statements can cover any period of time and are published monthly, quarterly and annually. Some companies also see income statements on a daily basis. The income statement puts the income first, followed by the expenses. The last line of the income statement shows the net gain or loss of the reported period. Income statements also list non-monetary transactions, such as depreciation, as well as earnings per share.
Statement of cash flows
The income and physical expenses are listed in the statement of cash flows. The elements of this statement differ from the entries in the income statement in that only transactions result in money physically entering and leaving the company and registering. For example, amortization expenses are not shown because a company does not write an asset depreciation check. This statement is important because it details the cash that a company has available to pay expenses.
The statement of retained earnings is not one of the basic financial statements requested by investors or corporate interest groups. This statement links the income statement to the balance sheet. In essence, the statement of retained earnings reconciles the company’s net profit or loss and dividends paid. The cumulative earnings section of the balance sheet rarely reconciles with the net profit or loss that appears in the income statement as a result of dividends paid on a periodic basis. This answers the statement questions investors, lenders and management members may have about discrepancies.