Meaning
According to John N. Myer, “The financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the income statement showing the results of operations during a certain period.”
Five Types of Financial Statements
The five main types of financial statements are:
Statement of Financial Position
Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a given date. It is comprised of the following three elements:
- Assets:Something a business owns or controls (e.g. cash, inventory, plant and machinery, etc)
- Liabilities:Something a business owes to someone (e.g. creditors, bank loans, etc)
- Equity:What the business owes to its owners. This represents the amount of capital that remains in the business after its assets are used to pay off its outstanding liabilities. Equity therefore represents the difference between the assets and liabilities.
Income Statement
Income Statement, also known as the Profit and Loss Statement, reports the company’s financial performance in terms of net profit or loss over a specified period. Income Statement is composed of the following two elements:
- Income:What the business has earned over a period (e.g. sales revenue, dividend income, etc)
- Expense:The cost incurred by the business over a period (e.g. salaries and wages, depreciation, rental charges, etc)
Cash Flow Statement
Cash Flow Statement, presents the movement in cash and bank balances over a period. The movement in cash flows is classified into the following segments:
- Operating Activities: Represents the cash flow from primary activities of a business.
- Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories (e.g. purchase of a factory plant)
- Financing Activities: Represents cash flow generated or spent on raising and repaying share capital and debt together with the payments of interest and dividends.
Statement of Changes in Equity
Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the movement in owners’ equity over a period. The movement in owners’ equity is derived from the following components:
- Net Profit or loss during the period as reported in theincome statement
- Share capital issued or repaid during the period
- Dividend payments
- Gains or losses recognized directly in equity (e.g. revaluation surpluses)
- Effects of achange in accounting policy or correction of accounting error.
Fund Flow Statement
The fund flow statement, also known as the Application of Funds and Statement of Sources, is a statement designed to analyse changes in the financial position of enterprises. This statement will include the following components to show the sources of funds received and their expenditures:
- Application of funds: how the funds have been utilised by the organisation
- Sources of funds: how the funds have been incurred by the organisation.