Types of Financial Statements & How They're Used

Financial statements are the language of business. They tell stakeholders, investors, creditors, and management where a company stands, how it’s performing, and where it’s headed. In this article, we’ll explore the four main types of financial statements and how each is used to make informed decisions.

What Are Financial Statements?

Financial statements are formal reports. Summarizing a company’s financial performance and position. They are prepared according to standard accounting frameworks such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards), ensuring consistency and comparability across companies and time periods.

These statements provide insights into key aspects of a business:

Assets and Liabilities – What the company owns and owes (debt in).
Revenues and Expenses – How much the company earns and spends.
Cash Movements – How cash flows in and out of the business.
Shareholders’ Equity – How the owners’ interest in the company changes over time.

The Four Key Financial Statements & Their Uses

1. Balance Sheet (Statement of Financial Position)

What it shows: A sheet at a point in time of a company’s assets, liabilities, and equity.
Key formula: Assets = Liabilities + Equity

Components:

Assets (current and noncurrent): what the company owns or controls.
Liabilities (current and long-term): what the company owes ( is in debt for).
Equity: owners’ residual interest (assets minus liabilities).

Usage:

Assess financial stability and leverage.
Determine the amount of capital tied up in operations.
Check wealth and how well commitment can be met.

2. Income Statement (Profit & Loss Statement)

What it shows: Performance over a period; revenues, expenses, and resulting net income or loss.

Key structure: Revenue – Cost of Goods Sold = Gross Profit

Then subtract operating expenses, interest, taxes, etc., to get Net Income.

Usage:

Track business performance over time.
Compare profitability across periods.
Identify cost drivers and efficiency improvements.

3. Cash Flow Statement

What it shows: The cash flow statement illustrates how cash enters and leaves a business over a specific period. It is split into operations, investing, and financing.

Sections:

Operating Activities: cash from core business operations
Investing Activities: cash used for or generated from asset acquisitions, investments
Financing Activities: cash raised or paid via debt or equity (borrowing, dividends, shareholders’ capital).

Usage:

Understand liquidity (can the company pay its bills?)
See how the company invests and finances itself.
Identify discrepancies between accounting profit and actual cash flows.

4. Statement of Shareholders’ Equity (Statement of Equity)

What it shows: The changes in equity accounts during a period, e.g., retained earnings, new share issuances, dividends.

How it’s used:

Understand how profits are distributed or retained
Track how equity is changing over time
Link net income to owners’ value

How They Work Together

Financial statements are interconnected, creating a complete view of a company’s financial position and performance:

Net income from the income statement flows into the Statement of Equity through retained earnings.
The Cash Flow Statement reconciles net income with actual cash movements.
The Balance Sheet shows closing balances of assets, liabilities, and equity. Overall, reflecting the increasing effects of operations, cash flows, and equity changes.
The Statement of Equity explains how shareholders’ interests changed during the period.

Together, they provide a comprehensive view of financial health, performance, and position.

Limitations to Keep in Mind

They reflect past data, not always predictive of the future.
They don’t capture non-financial factors like brand value, customer loyalty, or employee morale.
Figures often depend on judgments and estimates (e.g., depreciation, provisions) and thus may vary among companies.
Differences in accounting standards (GAAP vs IFRS) can affect comparability.

Final Thoughts

Understanding financial statements is essential for anyone involved in business, finance, or investment. By analyzing the balance sheet, income statement, cash flow statement, and statement of equity, stakeholders can make informed decisions, monitor performance, and assess financial health.

While these reports have limitations, they remain the foundation of corporate transparency, providing a consistent and reliable way to evaluate a company’s past performance and prospects.

At EduMont Classes, we help aspiring finance professionals master these concepts through our US CPA and US CMA training programs.