Understanding the Four Major Types of Financial Statements and Their Uses

by Greg DePersio

2 min read

The four main financial statements each serve their own purpose. While an entire set of financial statements tell the complete story of an organization, each report can stand on its own and is used for a different purpose. These four types of financial statements are typically required for external reporting purposes.

Income Statement

The income statement reports the revenues and expenses of an organization. The expenses are grouped and classified according to the type of cost. For example, product expenses relate to the cost to produce the good, selling expenses relate to the costs of customer outreach and product delivery, and administrative costs correlate to general company expenses. After expenses are deducted from revenues, net income is reported at the bottom of the financial statement. This income figure is used as an overall summary regarding the profitability of the entity. The income statement is useful to track expenses, especially when the information is compared to previous years. In addition, the income statement is typically aligned with a budget to analyze what has been spent to what the spending plan is for the period.

Balance Sheet

The balance sheet reports the assets of a company along with the ownership properties associated with those assets. In general, an asset can be financed through debt or owned by the company. Therefore, the total dollar amount of assets equals the total dollar amount of liabilities and owner’s equity. In addition, the asset and liability section break out accounts based on longevity of the balances. For instance, long-term debt is reported on a separate line than current debt. The balance sheet is most useful in short periods of time – it is the only financial statement based on a particular moment. While other financial statements like the income statement aggregate sales throughout a period, the balance sheet only reflects the current balance – such as how much cash is in the bank at the date of the report. This makes the report useful for liquidity and solvency analysis.

Cash Flow Statement

The cash flow statement reports the cash inflows and outflows of an organization based on multiple categories. Although there are two different methods of reporting a cash flow statement, both revolve around the concept of cash entering and exiting a business for different reasons. By using this report, a company distinguishes between cash received from a loan and cash received from a customer for a sale. This information is vital to an organization’s success, as the report helps develop resource forecasts to plan for major upcoming expenditures.

Statement of Changes in Shareholder Equity

Finally, the statement of changes in shareholder equity revolves around the ownership stake in the company. For a small business, this statement will not reflect many changes, as there will likely be one or minimal owners. Larger companies experience material swings in net income, dividends reported, changes in other comprehensive income, retained earnings, and private equity issuances. Investors use this information to see what part of the company is being financed by capital and earnings as opposed to debt.

References & Resources

Related Articles

Common External Users of Financial Statements

Companies use their financial statements to inform their stakeholders – including investors,…

Read more

Financial Statement Preparation: Note Disclosures

The financial statements of an organization should be informative and clear to…

Read more

How to Get Big Donors and Donations

Although there’s no denying that engaged donors tend to stick around longer,…

Read more