small business articles business management businesses Marketing sales Technology Business finance Lean Manufacturing small business Investing articles employee health

What is a financial statement, and how do you prepare one that meets the legal requirements

Financial statements are the actual records of a business' financial activities. Financial statements provide an overview of a company's profitability and their financial condition in both the short and long term. Financial statements are used by both internal and external users.

Internal users are owners, managers, or other people who are directly connected with the company who is preparing the financial statements. Some internal users use the financial statements to help them make important business decisions that can affect the operations of the company. Employees will also use financial statements in discussing their compensation, promotion, and rankings, which is known as collective bargaining. External users, such as creditors and potential investors use the financial statements to determine if the company will be able to pay any loans or if they company is a good choice to invest in. The government actually uses the financial statements to ensure that the right amount of taxes and other things declared by the company have actually been paid by the company.

There are four main types of financial statements: balance sheet, income statement, statement of retained earnings, and statement of cash flows.

Balance sheet:
The balance sheet is considered the snap shot of the company's financial condition at the time it is prepared. The balance sheet reports all of the company's assets and liabilities and owners' equity for a certain period of time (either end of fiscal year or calendar year). The reason why it is called a balance sheet is that the assets must equal the liabilities and owners equity at all times, if the balance sheet does not balance at any given period then a mistake has been made or accounting rules were not followed.

Income statement:
This statement is also known as the profit and loss statement outside of the United States. The income statement tells people how the net earnings of a company are turned into net income. This is done by determining the amount of sales or services provided and then by subtracting out all of the business expenses. The purpose of this statement is to show people whether or not the company made money or lost money for the reporting period. Just keep in mind that is still possible to have a successful business even if you were operating at a net loss at the end of the year.

Statement of retained earnings:
This statement is used to explain the changes in a company's retained earnings during a certain reporting period. It provides a break down of any changes affecting the retained earnings account. The statement of retained earnings gets its information from the income statement and provides information for the balance sheet. This statement can appear in the balance sheet, in a combined income statement and changes in retained earnings statement or it can appear on its own.

Statement of cash flows:
This is a statement that shows how a company's cash was used during the reporting period. Some companies prepare this statement quarterly, while others prepare them once a year with the rest of their financial statements. Unlike the other three this statement is not required to be filed according to Generally Accepted Accounting Principles. This statement shows how the changes in balance sheet and income accounts have affected the company's cash. This statement also provides further information on the company's operating, investing and financing activities.

Financial statements must be filed by any corporation that is publicly traded. In order to meet the legal requirements the financial statements must be prepared following the rules and guidelines known as Generally Accepted Accounting Principles; these are used to ensure that all financial statements are similar in appearance and can be compared with other companies' financial statements for investing and other purposes.

FREE: Get More Leads!
How To Get More LeadsSubscribe to our free newsletter and get our "How To Get More Leads" course free via email. Just enter your first name and email address below to subscribe.
First Name *
Email *

Get More Business Info
Business Info
Marketing and Sales
Small Business
Employee Health and Fitness

Sponsored Links
Recent Articles


Search This Site

Copyright 2003-2020 by - All Rights Reserved
Privacy Policy, Terms of Use