What Is a Financial Statement: 4 Types With Examples

Whether you're just starting a business or have been operating for a while, having transparent financial reports is crucial. Eventually, you will need to clarify your financial situation, whether for a loan application, investor pitches, or strategic decisions like pricing and revenue projections. In these situations, you will likely need "financial statements."

This article will cover the basics of financial statements, why they're necessary, the various types and examples, and the differences between audited and unaudited statements.

Financial statements are a compilation of written records that display a company's financial activities and performance at a specific time, usually annually, quarterly, or monthly. The purpose is to provide the company's financial position information to internal and external stakeholders.

Financial statements are typically prepared by bookkeepers and accountants who adhere to Generally Accepted Accounting Principles (GAAP) or industry-specific best practices.

Financial statements are crucial for monitoring a company's financial health, obtaining funding, and reducing tax complexities.

Companies often prepare these statements quarterly to assess business profitability, financial stability, and resource allocation. This aids in making informed key decisions, such as pricing strategies, cost reduction, and growth planning.  

When seeking outside investment or loans, these statements offer shareholders and creditors crucial details to assess the company's creditworthiness, risks, and potential returns on investment or loans. Properly prepared financial statements could make securing necessary funding more attainable.

Lastly, annual financial statements are crucial for tax reporting and tax return filing.  Documenting income, expenses, assets, and liabilities in the statements simplifies completing the paperwork required by tax authorities each year.

The primary types of financial statements are the balance sheet, income statement, cash flow statement, and statement of retained earnings. 

Each offers a different perspective on a company's financial status. Combined, they provide a complete picture for owners, stakeholders, and investors. 

Let's look into each of these statements to understand their significance and components.

A balance sheet is a summary of a company's assets (what the company owns), liabilities (what the company owes), and shareholders' equity (the net worth of shareholders) at the end of a specific period in time, most commonly a year. 

This statement is alternatively known as a statement of financial position or a statement of financial condition.

The 3 main components of a balance sheet consist of assets, liabilities, and shareholders' equity. The table below breaks down the key details. 

This statement is called a balance sheet because the total assets must equal the total liabilities and shareholders' equity, ensuring the balance between what a company owns and what it owes.

Therefore, the balance sheet follows the equation: 

An income statement is a financial record that presents a company's revenue and expenses over a specific period, most commonly a year, indicating whether the company is making a profit or loss. This statement helps business owners determine profit-generating strategies, such as increasing revenues or reducing costs.

An income statement is also referred to as a profit and loss (P&L) statement or an earnings statement.

The main components of the income statement include revenue, expenses, and net profit or loss. 

These may be broken down into

• Revenue: The total income earned by a business within a specific period.
• Costs of goods sold (COGS): The total expense of making the products, covering the cost of materials and labor.
• Gross profit: The total revenue deducts COGS.
• Total expenses: The total amount of money spent to make, sell, or promote the products.
• Operating income: The total profits minus operating expenses, such as equipment and labor costs.
• Depreciation: The reduction in value of a company's assets over time.
• Pretax income or income before taxes: Income minus costs but before taxes are subtracted.
• Net income: The total income after deducting all costs.

The income statement formula can be written as:

A cash flow statement, also known as a statement of cash flows, aggregates data regarding all cash and cash equivalents, inflows, and outflows that a company experiences in a given period. 

This statement shows where cash is being generated and used and whether the business has enough liquid cash to meet its obligations and invest in assets.

A cash flow statement includes operating activities, investing activities, and financing activities. 

• Operating activities: the cash flow generated or used in regular business operations, including revenue and expenses from goods and services provided.
• Investing activities: The cash flow from buying or selling assets, such as real estate and vehicles, or intangible assets like patents and licenses.
• Financing activities: The cash flow resulting from the acquisition of debt or equity.

The retained earnings statement is a financial report that shows the net income a company has retained after distributing dividends to shareholders. It also outlines the changes in this balance during a particular accounting period.

These earnings are usually used to pay off debts or reinvest. When retained earnings gather over time, they can be referred to as accumulated profits.

Some company's financial statements may not feature a separate statement of retained earnings. Instead, this information is included or provided as an addendum to either the income statement or balance sheet.

A statement of retained earnings is also called a statement of change in equity.

The retained earnings consist of three main elements: the initial retained earnings at the beginning of the period, the net profit incurred during the accounting period, and the dividends distributed in both cash and stock during the accounting period.

• Beginning Retained Earnings: This is the equity balance from the end of the previous period, which carries forward to the start of the current period.
• Net Income: The profits generated from operations, automatically adding to the company's equity and transferring to retained earnings at the end of the year.
• Dividends: This represents the portion of profits distributed to shareholders rather than being retained by the company.

Retained earnings are calculated by combining the beginning retained earnings with the net income for the current period and then subtracting any dividends paid out to shareholders. 

In other words, the formula is:

Essentially, a company’s operations, investments, and financing activities are interrelated, resulting in the connection between various types of financial statements.

For instance, the net income detailed in the company's income statement initiates the cash flow statement and contributes to retained earnings on the balance sheet, retained earnings on the statement of retained earnings will be stated on the balance sheet, and depreciation recorded in the income statement affects asset values on the balance sheet. 

Changes in working capital, asset purchases, borrowing, debt repayment, dividends, or stock repurchases affect both the cash and equity balances on the balance sheet and the cash flow statement.

Unaudited financial statements are reports prepared by accountants but have not undergone examination and verification by an external independent auditor. 

In contrast, audited financial statements are reviewed by a certified public accountant (CPA) to ensure compliance with standard accounting rules. Naturally, audited financial statements are more credible, but they require additional time and cost to prepare.

Whether financial statements require auditing depends on the entity and jurisdictions. For instance, in the US, publicly traded companies must file audited financial statements. Similarly, in New Zealand, financial statements submitted to the Companies Office must be audited. In Hong Kong, the Hong Kong Companies Registry mandates auditing for all companies. 

When securing a loan or funding, most potential funders and creditors prefer audited financial statements over unaudited ones.

Keeping good financial records is essential for a successful business. However, bookkeeping can easily get complicated if you combine personal and business finances in a single account. Hence, having a dedicated business account is the vital first step.

A business account that can be integrated with accounting software and allows you to connect and download transactions directly from your linked business bank account will be a significant plus. This will simplify not only your financial statement preparation but also your overall financial management.

If your business is registered in Hong Kong, Singapore, or the BVI, Statrys offers a multi-currency business account integrated with Xero accounting software and a comprehensive reporting dashboard. 

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