Basic Financial Statements

financial statements help

Introduction to the Financial Statement

Before we start, you can take a look at our accounting formulas cheat sheet that will make the process of calculations a lot easier for you. Now, let’s get to the point. Basic accounting financial statements present the results of the operations, show the financial position of the company, and are made up of four basic reports, which are as follows:

  • Income statement. Presents the revenues, expenses, and income incurred during the reporting period. This is usually regarded as the most important of the financial statements, since it presents the financial position of an entity.
  • Balance sheet. Shows the assets, liabilities and equity of the financial reporting date. Thus the information is presented as at a defined point in time. The report format is structured so that the total of all assets equals the total of all liabilities and equity (regarded as the accounting equation). This is typically considered the next most important financial statement, since it illustrates the nature of the liquidity and capitalization of an organization.
  • Statement of cash flows. Presents the inflow of cash and outflow of cash which occur during the financial period. This can provide a useful comparison tool to the income statement, especially when the amount of income reported does not match the cash flows experienced by the firm. This statement may be presented when distributing financial statements to outside parties.
  • Statement of retained earnings. Presents changes in equity incurred during the financial reporting period. The report format varies but can include the sale or redeemed stock, dividend payments, and variations caused by reported profits or losses. This financial statement is the least used of the four the financial statements and is usually included in the audited financial statement.
  • When the financial reports are issued internally, the management team usually only sees the income statement and balance sheet, since these documents are relatively easy to prepare.
  • The four basic financial statements may be accompanied by detailed disclosures that provide supplementary information about certain topics, as defined by the related accounting framework (like generally accepted accounting principles).

Basic Financial Statements Sample

Now let’s explore the different types of financial statements samples.

 

What You Need to Know about Financial Statements in Accounting

Basic financial statements in accounting:

  • income statement contains details about the revenues, expenses, losses and gains of the company.
  • on the income statement, the revenue refers to the money earned through the normal business operations of the organization.
  • sale of an asset can result in a capital profit or loss.
  • the net income can be determined by adding the revenues and gains and deducting the expenses and losses on an income statement.
  • balance sheet illustrates the assets, the liabilities and the equity of the organization.
  • these details will be listed as they appear on the date the report is printed.
  • categorize the assets on the balance sheet as fixed assets or current assets.
  • current assets have the highest liquidity and they be easily converted to cash.
  • fixed assets are meant to be longer term.
  • liabilities are classified similarly current liabilities and as long-term liabilities.
  • current liabilities are monies which must be paid in less than a year.
  • long-term liabilities have a repayment period of over a year.
  • shareholder’s equity refers to the total equity of the business.
  • balance sheet is structured in such a way that allows the assets to be equal to the liabilities and the equity (the accounting equation).
  • statement of shareholders’ equity describes the changes which occur in the equity account of the shareholders.
  • statement of shareholders’ equity details the beginning and ending balance for common and preferred stocks as well as retained earnings.
  • cash flow statement illustrates the total value of cash that an organization has at the financial reporting date.

All factors which affect the cash balance will be mentioned within the financial statement.The financial activities will appear in the first section of the financial statement which shows the working cash inflow and outflow. This section also contains the net income among other details. It is followed by the investment activities section, which details the monies consumed and received on the capital investments. The financial activities section follows this and it contains details of the cash inflows and outflows as derived from the financial securities of the organization. All four financial statements are intricately interlinked.

Management uses the profit and loss to assess the use of assets and liabilities during the financial reporting period. The cash flow statement, which shows the inflows and outflows of cash, enables the owners to learn about the sum total the available cash. This will be mentioned in the balance sheet or the statement of financial position as well. The main financial statements should be analyzed as an integrated package, will showcase a comprehensive view and understanding of the fiscal condition of an organization and can be used by management to make critical decisions on running the organization. Higher investment levels by shareholders show potential shareholders that the company is worth investing in since so many investors are willing to finance the company.

Find out what an account classification method is and how to make use of it.

Solving the Accounting Financial Statements Assignment

ASSIGNMENT

accounting financial statements assignment

SOLUTION

basic financial statements sample step

Net Income (Net Profit): Shuttle Revenue – Total Expenses = $69,300 – $48,600 = $20,700

This net income amount is feed into the balance sheet statement and it is inserted as a line item in the Shareholders’ Equity Section.

basic accounting financial statements step

 

Sherry’s Shuttle only has enough current assets to pay 13 percent of its current liabilities.

basic financial statements in accounting step

calculations

  • measures a company’s total liabilities as a percentage of its total assets.
  • shows that the company is highly leveraged and highly risky.
  • shows a company’s ability to pay off its liabilities with its assets.
  • a low debt ratio of 0.36 implies a more stable business with a potential of longevity due to its low debt levels.
  • measures a number of assets which are financed by the owners’ investments by comparing the total equity in the company to the total assets.
  • a high equity ratio of 0.64 indicates that the company is worth investing in since so many investors are willing to finance the company.

debt ratio

equity ratio

The basic financial statements summarize the financial activities of the business. They can be prepared at any point in time (such as the end of the year, quarter or month). You are now equipped with the knowledge to illustrate a basic financial statement sample, explain basic financial statements and how they are used in accounting.

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Basic Financial Statements
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