14 January 2013
Financial Statement Differentiation
The four different types of financial statements are Income Statement, Retained Earning Statement, Balance Sheet, and Statements of Cash Flows.
The income statement reports the success (profits) or failure (loss) of the business operations for a specific time period. It typically will show gross profit, operating income, and net income after taxes. The retained earning statement shows the amounts and changes in retained earnings during the same time period specified in the income statement. It will show previous retained earnings plus net income minus dividends to arrive at the new retained earnings. The balance sheet reports assets and claims to assets at a specific time period. Claims to assets are subdivided into claims of creditors (liabilities) and claims of owners (stockholders’ equity). The basic accounting equation Assets= Liabilities + Stockholders’ Equity is from where the name “balance sheet” is derived. Assets must balance with the claims to assets. (Kimmel PhD, CPA, Weygandt PhD, CPA, & Kieso PhD, CPA, 2009) The statement of cash flows shows the cash inflows and outflows of a business for a specified time period. “The statement of cash flows reports the cash effects of a business operating, investing, financing activities, and the increase or decrease of cash during that specified time period” (Kimmel PhD, CPA, Weygandt PhD, CPA, & Kieso PhD, CPA, 2009)
Investors will or should begin by reviewing and analyzing three of the four types of financial statements because no one statement can tell the whole story. These should include the balance sheet, income statement, and cash flow statement. The financial track record of a business can be seen in the balance sheet. It summarizes a company’s capital structure; various account balances and the short-term versus the long-term objectives...