Financial Statements: List of Types and How to Read Them

Introduction to Financial Statements

Financial accounts or statements refer to the written documents that describe the operations and financial success of any company. Governmental organizations, accounting companies, etc., frequently review these financial records to ensure the correctness of data and for tax, financing, or investing purposes. The balance sheet, revenue statement, statement of cash flow, and statement of changes in equity are the four main financial statements accounts used most by for-profit businesses. In contrast, a comparable but distinct collection of financial records is used by non-profit organizations.

To assess a company's success and forecast future stock price movements, investors and financial experts often use financial statistics. The company's yearly report, which includes its financial records, is one of the most crucial sources of trustworthy and confirmed financial information. The financial records of a business are used to evaluate its financial situation and future chances for profit by creditors, market analysts, and investors. The three primary reports of a financial statement are the balance sheet, the income statement, and the cash-flow statements.

Balance Sheet

The balance statement is a snapshot of a company's assets, liabilities, and equity held by shareholders. The date, which is usually the end of the reporting period, can be found at the top of the balance sheet to determine when the report was documented. Below is a summary of the elements that make up a balance statement:

Assets

• Cash and cash equivalents, such as Treasury notes and certificates of deposit, are considered liquid commodities.
• The sum of money due to the business by its clients for the selling of its goods and services is known as accounts receivable.
• Inventory is the stock of products that a business keeps on board and plans to sell regularly. Inventory can include completed products, unfinished work in progress, or raw materials that are on hand but have not yet been processed.
• Prepaid expenditures are costs that have been paid in advance of the date they are due. These costs are documented as an asset because their worth has not yet been determined; should this not happen, the business would potentially be entitled to a refund.
• A business owns property, machinery, and equipment as capital assets for long-term gain. This includes structures that are used for production and large equipment or types of machinery that are used to handle raw materials.
• Assets kept for potential future development are called investments. These are merely kept for capital appreciation and are not used in activities.
• Intangible assets, such as trademarks, patents, goodwill, and others, cannot be directly handled but have potential fiscal (and frequently long-term) advantages for the business.

Liabilities

• Bills that must be paid as part of a business's regular activities are known as accounts payables. Utility expenses, leasing statements, and commitments to purchase raw materials all fall under this category.
• Wages payable are sums owed to employees for hours worked.
• Official debt arrangements, including the payment timetable and sum, are documented in notes payable, which are the recorded debt instruments.
• Rewards payable refer to rewards that have been announced but haven't yet been paid to stockholders.
• Long-term debt can refer to a range of commitments, such as mortgages, sinking bond funds, or other debts that are fully repaid over a period of more than a year. Keep in mind that this debt's short-term component is listed as a current/ ongoing liability.

Investors' Equity

• The equity of shareholders is equivalent to the company's total assets minus its total liabilities. Shareholders' equity, also called owners' equity, is the sum of money that would be given back to shareholders if the company's assets were all sold and its debt was fully repaid. The amount of net profits that were not distributed to shareholders as dividends is known as retained earnings and are a component of shareholders' equity.

An Illustration of a Balance Sheet

An excerpt from the balance statement for ExxonMobil Corporation (XOM) as of December 31, 2021, is shown below.

• There were $338.9 billion in total assets.
• Liabilities as a whole were $163.2 billion.
• Equity as a whole was $175.7 billion.
• The total liabilities and equity for the time came to $338.9 billion, equalling the total assets for that period.

Income Statement

Unlike the balance sheet, the income statement is a time-based document that usually covers a year for annual financial statements and a quarter for quarterly financial statements. The financial statement typically provides a summary of revenue, expenses, total income, and earnings per share (EPS).

Revenue

Selling goods or services generates operating income or revenue for any business. The manufacturing and selling of automobiles would generate operating income for a car manufacturer. Operating income is produced by a company's main lines of business.

The income derived from non-core company operations is known as non-operating revenue. These earnings are unrelated to the company's main purpose. Examples of non-operating income include:

• Interest received on cash in a bank account
• Rental income from a property
• Income from strategic alliances like royalty payment receipts
• Income from an advertisement shown on the business's property

Revenue derived from unrelated sources is known as other money. Gains from the selling of long-term assets like property, vehicles, or a subsidiary may also count as other revenue.

Expenses

When a company engages in its main activity, it incurs major expenses in order to generate revenue from that activity. Cost of goods sold (COGS), marketing, selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D) are examples of expenditures.

Employee salaries, sales fees, utilities like energy, and travel costs are all examples of typical costs/ expenses.

Interest paid on debts or loans is a cost associated with secondary pursuits. Expenses are also noted for losses on asset sales.

The income statement's primary function is to communicate information about profitability and the financial outcomes of company operations, but it can also be a very useful tool for demonstrating whether sales or revenue are rising when contrasted across multiple time periods.

In order to assess whether a company's attempts to lower its cost of sales will ultimately increase profits, investors can also look at how well a company's management is controlling expenditures.

Example of an Income Statement

An excerpt from ExxonMobil Corporation's income summary for the fiscal year 2021, as of December 31, is provided below:

• $276.7 billion was earned overall.
• $254.4 billion was spent overall.
• There was $23 billion in net revenue or profit.

Cash Flow Statement

The cash flow statement (CFS) gauges how effectively a business produces cash to cover debt payments, running costs, and investments. The cash flow statement is like a supplement to the balance sheet and income statement.

The CFS provides information to investors about a company's operations, sources of financing, and financial practices. The financial strength of the company is also measured by CFS.

A financial cash flow statement cannot be calculated using any specific method or mathematical formula. Instead, it has three parts that detail cash flow information for the various purposes for which a business uses its funds.

The following is the explanation of those three CFS components:

Operating Activities

Any sources and expenditures of money resulting from managing the company and making sales of its goods or services are considered working operations activities of the CFS. Cash from operations includes any adjustments of accounts payable, depreciation, inventory, and financial accounts owing. This collection of interactions also includes wages, tax on income, interest, rent, and cash proceeds from the sale of products or services.

Investing Activities

Any sources and uses of money from a business's investments, in the long run, are considered investing activities. This group includes any payments connected to a merger or acquisition as well as the purchasing or selling of an asset, loans given to or received from suppliers, and client debts.

Additionally, this part includes acquisitions of fixed assets like property, plant, and equipment (PPE). In other words, adjustments to investments, equipment, or assets are related to income from investments.

Financing Activities

In addition to the uses of cash given to shareholders, cash from financing activities also includes cash obtained from banks or investors. One can finance a business by issuing debt, issuing shares, buying back stock, taking out loans, paying profits, and repaying debt.

These are three main company operations, and with that, the cash flow statement reconciles the income statement with the balance sheet.

Example of a Cash Flow Statement

The cash flow summary for ExxonMobil Corporation's fiscal year 2021, as of December 31, is shown in part below:

The three components of the cash flow summary are visible, as are their outcomes.

• Cash flow was favorable from operational activities, reaching around $48 billion.
• For the time span, investing operations resulted in negative cash flow, or financial outflows, of -$10.2 billion. The bulk of cash withdrawals was for purchases of new property, plant, and equipment, indicating that the business made new fixed asset investments.
• For the time period, financing operations resulted in negative cash flow, or financial outflows, of $35.4 billion. Most of the revenue withdrawals were due to dividend payments and short-term debt reduction.

Statement of Changes in Shareholder Equity

The summary of variations in equity depicts the evolution of total equity. The ending balance on the change in equity statement is identical to the total equity stated on the balance sheet, which shows how this information relates to a balance sheet for the same time period.

The method for stockholder equity ownership adjustments will differ from one business to another, but generally speaking, there are the following components involved:

• Beginning equity is the equity at the conclusion of one time that automatically transfers over to the beginning of the next.
• (+) Net income is the total revenue a business generates during a specific time frame. At the year's conclusion, the revenue from activities is rolled into retained earnings after being immediately acknowledged as equity in the business.
• (-) Dividends refer to the sum of money distributed to stockholders as a result of earnings. A business may decide to offer some of its earnings to investors rather than retain them all.
• (+/-) Other comprehensive incomes are the change in other comprehensive incomes from one time to the next. This amount could increase or decrease ownership depending on the deals.

ExxonMobil also includes actions for purchases, sales, amortization of stock-based rewards, and other financial activity in its summary of changes in equity. This data can be used to evaluate how much money is being kept by the business for expansion rather than distributed to third parties. Look at the following consolidated statement of changes in equity of ExxonMobil, produced in 2021:

Statement of Comprehensive Income

A statement of comprehensive income, a frequently underutilized financial statement, outlines standard net income while also taking changes in other comprehensive income (OCI) into account. All unrealized profits and losses that are not shown on the income summary are included in other comprehensive income. This financial summary includes profits and losses that have not yet been documented in line with bookkeeping regulations. It also displays a company's total change revenue.

The following are some instances of transactions that may appear on the statement of comprehensive income:

• Net profit (from the statement of income)
• Debt securities' unrealized profits or losses
• Profits or losses from derivatives that have not yet been recognized
• Translational changes that weren't made because of foreign money
• Loses or profits from unrealized retirement program investments

ExxonMobil has a total unrecognized income of more than $2 billion in the case below:

When comprehensive income is taken into account, ExxonMobil reports nearly $26 billion in total income as opposed to just $23.5 billion in net income.

Non-profit Financial Statements

Financial activities are recorded in a comparable collection of financial statements by non-profit groups. The financial accounts used vary depending on whether the organization is for-profit or solely charitable due to certain variations. The typical collection of financial documents used by a non-profit organization consists of the following:

• The Statement of Financial Position: This primarily serves as a for-profit entity's balance sheet substitute. The biggest distinction is that non-profit organizations do not hold stock positions; instead, they have what is referred to as "net assets", which are any remaining funds after all assets have been sold and obligations have been paid in full.
• Statement of Activities: This is comparable to the account of revenue for a for-profit company. This report reflects an account of how the business has evolved over time, including the contributions, grants, profits from events, and costs incurred to make everything happen.
• Statement of Functional Expenses: Only non-profit organizations should use this. By entity function, expenditures are reported in the summary of functional expenses (often broken into administrative, program, or fundraising expenses). The public is given access to this information to better understand what percentages of corporate costs are directly attributable to the purpose.
• Summary of Financial Flow: This is the same as the summary of financial flows for a for-profit organization. The statement is still broken down into running, spending, and funding operations, even though the funds mentioned may differ due to a charity organization's unique characteristics.

Limitations of Financial Statements

Despite the fact that financial records offer a wealth of data about a business, they do have some restrictions. Investors frequently come to very different inferences about a company's financial success as a result of the statements' interpretive openness.

For instance, some investors might favor equity repurchases, whereas others might desire to see that money put toward long-term investments. One investor may find a company's debt level to be acceptable, while another may find the amount of debt for the business to be concerning.

The outcomes of the business should be compared to those of its competitors in the same sector when analyzing financial statements to look for patterns. Multiple periods should also be compared.

Last but not least, the accuracy of financial records depends on the data used to generate them. It has been recorded too many times that erroneous financial activity or poor control monitoring results in financial statements that are meant to deceive users. There is a degree of confidence that users must put in the veracity of the report and the numbers being shown, even when examining certified financial records.

What types of financial statements are most popular?

The three main types of financial accounts are the balance sheet, income statement, and cash flow statement. Together, these three financial statements show the assets, liabilities, income, outgoings, and cash flows of a business. Cash flow often comes from operations, investments, and financial events.

What are the important items appearing in the financial statements?

Depending on the company, individual items will vary in the annual financial statements. However, the most common items are revenue, cost of goods sold, taxes, cash, securities, inventory, current liabilities, long-term liabilities, accounts receivable, accounts payable, and cash flows from investing, operating, and financing activities.

What are the benefits available from financial statements?

A company's activities are shown in financial papers. It provides details about a company's assets, liabilities, running costs, cash flow management efficacy, and the volume and mode of a company's revenue generation. The financial records of an organization fully disclose the management approach employed. This overall helps measure the company's overall strength and stability.

Financial Statements: How do you read them?

A variety of techniques are used to analyze financial records. In order to better comprehend changes over time, financial records can first be compared to earlier times. Comparative revenue statements, for instance, detail a company's money from the previous and current years. Users of financial statements are informed of a company's well-being by noting the difference from year to year.

Financial accounts are also analyzed by contrasting the outcomes with those of rivals or other market players. Analysts can gain a better understanding of which businesses are performing best and which are trailing the rest of the industry by comparing financial statements to those of other similar firms.

GAAP: What is it?

The collection of guidelines known as Generally Accepted Accounting Principles (GAAP) dictates how American businesses must prepare their financial records. The rules specify how transactions are to be recorded, when revenue must be acknowledged, and when expenditures must be recognized. International Financial Reporting Standards (IFRS) is a comparable but distinct collection of guidelines that foreign businesses may employ.

The Bottom Line

The key to an outside assessment of a company's financial success is its financial statements or records. While the revenue statement provides information on a company's profitability, the balance sheet provides information on the liquidity and viability of the business. By keeping account of the origins and uses of money, a statement of cash flow links these two together. Various financial records, taken or measured in aggregate, show how a business is performing over time and in comparison to its competitors.