Identifying Four Basic Financial Statements

Identifying Four Basic Financial Statements

Business growth and performance can be measured in many ways, but financial statements are key to understanding and evaluating a company’s total business. These financial statements are the report card for all companies on performance. They summarize a company’s accounting data and tell the story of their position in the marketplace. This paper will review the four basic financial statements, how they interrelate, as well as their value to managers, investors, creditors and employees.

Income Statement

An income statement shows sales, expenses and profit during a given accounting period, usually either a quarter or a year. This statement is also known as Statement of Operations, Statement of Earnings, Profit and Loss and P&L.

Profitability is the most important thing on the income statement. Revenues are listed first on the income statement, followed by a breakdown of expenses and a total. In conclusion, the net income or net loss is reflected.

In assessing the overall financial standing of a company, it’s important to look at the income statement and the balance sheet together, as the income statement captures the company’s operating performance and the balance sheet reflects its net worth.

Potential investors and creditors will want to carefully examine the income statement before they decide to invest or provide financing. Managers will use this information to track the company’s progress and make refinements to their business plans and goals. Employees might reference this statement to determine the stability of their employment, based on the company’s sales performance.

Retained Earnings Statement

A retained earnings statement shows the changes in retained earnings over a set period of time. Retained earnings are not paid out as dividends. They are retained and reinvested in the business. This statement is also known as Statement of Changes in Owner’s Equity.

Data from the income statement is used to...