Companies must produce a series of financial statements to provide information on the their activities, net worth and viability. There are three main financial statements maintained by companies and each plays a different role. Investors, lenders and stockholders have an interest in the financial statements, as do owners and members of management.
The balance sheet lists the assets, liabilities and equity of a business. Balance sheets do not list the daily income and expenses, but rather detail the results of such activities. Assets and liabilities are first classified as current or long-term. Current assets and liabilities are expected to be consumed or paid within a year while long-term assets and liabilities going beyond a year. Assets and liabilities are then listed in order of liquidity, which means the items that can be liquidated first are listed first. Investors and lenders use liquidity information to determine a company's ability to pay debt. Finally, the company’s equity position shown on the balance sheet shows the net worth of the company.
The income statement is also known as a profit and loss statement. This statement lists all the revenue and expenses of a company from operation and investment activities. Income statements can cover any period of time, and are frequently published monthly, quarterly and annually. Some companies also view income statements on a daily basis. The income statement first lists revenue, followed by the expenses. The last line of the income statement shows the profit or loss for the period reported. Income statements also list non-cash transactions such as depreciation, as well as earnings per share. Stockholders use earnings-per-share information to determine the cash available for dividend payouts if the company declares a dividend during the period.
Statement of Cash Flows
The statement of cash flows lists physical income and expenditures. The items on this statement differ from the income statement entries in that only transactions that result in money physically entering and leaving the business are recorded. For example, depreciation expenses are not shown because a company does not actually write a check for asset depreciation. This statement is important because it details the cash a company has available to pay expenses.
The statement of retained earnings is not one of the primary financial statements requested by investors or business stakeholders. This statement links the income statement to the balance sheet. Essentially, the statement of retained earnings reconciles the net income or loss of the business and the dividends paid. The retained earnings section of the balance sheet rarely reconciles with the net income or loss shown on the income statement as a result of dividends being paid on a periodic basis. This statement answers questions investors, lenders and members of management may have about discrepancies.