There are four primary financial statements: income statement, balance sheet, cash flow statement, and statement of shareholders' equity. Each of these financial statements reflects a different aspect of a business's financial situation. When used together, the four financial statements provide a robust illustration of a company's financial standing. The statements are tools used by investors and creditors to evaluate the health of a company for investment or lending purposes. Each country adopts a given set of accounting rules. The International Accounting Standards Board (IASB) is the most popular standard-setting body, with approximately 100 countries conforming to its rules. Some countries, such as the United States, choose to develop their own accounting rules. In the United States, the Financial Accounting Standards Board (FASB) promulgates accounting rules.
At A Glance
- The standards of accounting are set by two organizations: the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). These groups share some commonalities but vary in terms of their scope and jurisdiction.
- The accounting standards that are likely to be used, depending on the country, will be a domestic set of generally accepted accounting principles (GAAP), or international financial reporting standards (IFRS).
- Of the four primary financial statements—the balance sheet, the cash flow statement, the statement of shareholders’ equity, and the income statement—the income statement is one of the most frequently used, giving information about revenue and expenses.
- The income statement is primarily composed of line items relating to income or expense.
- The accounting equation balances assets to the total of liabilities and equity.
- The balance sheet gives a snapshot of a company's assets and liabilities at a given point in time; it includes current assets, fixed assets, intangible assets such as goodwill, current and long-term liabilities, and shareholders' equity.
- The statement of cash flows is used to evaluate the company's liquidity to meet its debt obligations and continue operations.
- The direct method of developing the statement of cash flows computes the sum of the different types of cash outflows and cash inflows, while the indirect method adds noncash expenses or subtracts noncash revenues from the company's net profit.
- The statement of cash flows, income statement, and balance sheet are interconnected; when taken together, the financial statements can be used to compute ratios that provide valuable information to stakeholders to enable proper and prudent decision-making.
- The statement of shareholders’ equity is a financial report that is associated with stockholdings and investments into the company; it shows the difference in the company's retained earnings for the start of the period and retained earnings for the end of the period.
- The statement of shareholders’ equity relates to the other financial reports through the accounting equation; the equation for the statement of shareholders' equity is the end of period retained earnings equal to the beginning of period retained earnings minus end of period dividends paid out plus end of period net profit.