What is a Financial Statement? Types, Format & Analysis

Disclaimer: The information published on LoansJagat is intended for general informational and educational purposes only and should not be considered financial, legal, or investment advice. Interest rates, loan terms, statistics, and other data may change over time and may vary by lender or source. Please verify the latest information and consult a qualified financial advisor or the respective Bank/NBFC before making any financial decisions.

Companies' financial statements show their financial position. It is a record of the company's activities. It covers cash inflows and cash outflows. People can get an idea about a company's financial situation, like how much the company earns, spends, owns and owes. 

 Investors get information like a company's profits, expenses, assets, liabilities, and cash flow. 

What is the purpose of financial statements? 

A financial statement gives an idea to investors and lenders an idea of a company's financial health and its performance. So that they can make informed decisions. 

Here are some important purposes of financial statements:

• Business owners and managers can make strategies and important decisions.
• Employees can negotiate salary and promotion by looking at the Company's financial condition.
• Investors can make informed decisions before investing in a company; they assess the profitability of the company.
• Banks and other lenders can also decide whether to give a loan or not by checking financial statements.

So financial statements help almost everyone because they provide a clear picture of a company’s financial position. 

What are the types of financial statements?

Companies use different types of financial statements for performance and position. There are mainly four types of financial statements. 

1. Income Statement (Profit and Loss Statement)

A company's income statement simply shows its income, expenses, and profit during a specific period. In simple words, it shows you whether the company is in profit or loss. 

Here is the format of an income statement:

Simply, your income statement shows how much your company is earning, spending, and saving. 

2. Balance Sheet

A balance sheet is the statement that shows the position of your business or organisation. No matter the size of the business, whether it is small or large, the balance sheet shows its position. 

The balance sheet is shown in the company's annual report. It gives information about a company's assets, liabilities, and shareholders' equity. 

3. Cash flow statement 

Many times, a company shows profit on paper, but it doesn't mean the company has enough cash flow. The cash flow statement shows real cash activity in the company. It helps investors and business owners understand how a company generates and uses cash.

Components of the cash flow statement:

We can say the Cash Flow Statement shows where a company's cash comes from and where it is spent. 

4. Statement of Shareholders' Equity

This statement shows changes in owners' equity of a company during a specific accounting period. It gives you an idea of why equity has increased or decreased due to profits, losses, dividends, and share transactions.

This statement also shows how companies use and distribute their profits. Moreover, it helps investors understand changes in a company's equity, including contributions, distributions, and retained earnings

Conclusion

Financial statements are the documents that show your Company's financial condition, performance, and cash position. Their basic purpose is to help people understand the operations, profitability, and financial health of your business. There are four types of financial statements. These statements give investors and lenders ideas about the company so that they can make informed decisions. These are also beneficial for businesses.  Businesses can track their performance and identify areas for improvement. 

Frequently asked questions 

What is financial statement analysis? 

Companies prepare their P and L to show the loss and profit. The balance sheet is used to know the total assets and liabilities of that company on a particular day. Both the P&L and the balance sheet are financial statements. In financial statement analysis, both statements are examined. 

What are the types of financial analysis?

There are four types of financial analysis: internal and external, horizontal and vertical, short and long, intra and inter form. 

What is a financial statement?

Financial statements are the record of the financial activities and position of a company. In the show, it tells you the profit and loss of the company. Financial statements comprise income statements, balance sheets, and cash flow statements. 

What is a cash flow statement?

Cash flow statements provide a summary of the company's cash inflows and outflows over the period. It is divided into three sections: operating, financing, and investing activities. 

What are the 4 methods of financial statement analysis?

Common methods of financial statement analysis include horizontal analysis, vertical (common-size) analysis, ratio analysis, and trend analysis. 

What are the 7 types of ratio analysis?

There are seven types of ratio analysis. Liquidity, profitability, solvency (leverage), efficiency (activity), coverage, market prospect (valuation), and cash flow ratios. 

Why are financial statements important?

The company's shareholders want to know about the dividend and the profit, investors want to know the future growth of the company, the government wants to know about the tax assessment of the company.  All this information is shown in financial statements that's why these statements become important. 

Who uses financial statement analysis?

Business owners, investors, and lenders use financial statement analysis. 

What is the purpose of financial statements?

The main purpose of financial statements is to give you a clear idea about your business's health. It also helps you track profit and make decisions. 

Can I prepare a financial statement manually? 

If you want to make a financial statement manually, you need to gather bills, receipts, and statements first. Then make an income statement, balance sheet, and cash flow statement. Then review all numbers carefully. 

*T&C apply