Financial Statements helps people get an idea of how a business is performing. Some of these reports indicate whether the company is making money, that is, spending wisely, or going bankrupt. Financial statements comprise balance sheet, income statement, cash flow statement, statement of changes in equity and notes to financial statements. Each of these reports tells a different story about the company’s financial health. Financial statement components This article is about all of the financial statement components in simple words and full detail.
Components of Financial Statements
A business creates various financial statements to show how it makes and spends money. We are not talking numbers with these reports. They allow investors, banks and business owners to see the performance of the company. As we study each of the key elements of financial statements one at a time, they are really quite simple.
These reports have a defined financial statement format. The structure allows people to notice differences from one company to another. In these statements, you can also know whether the company is strong or weak with money. These reports are used by several users, such as managers, shareholders, tax officials, etc., for decision-making.
So, each part of the financial reports serves a purpose. Some show profit and loss. Some display where the money’s from or where it’s going. Some statements also reflect changes in the owner’s capital. These sections are termed as components in financial statements. Let’s look at them in detail.
Important Components of a Balance Sheet
A balance sheet is a financial statement that reveals the value of a company at a specific time. It has three key balance sheet components — assets, liabilities, and equity. Those parts describe what a business owns, what it owes, and how much value the owners have in the company.
Assets
Assets are items that a business possesses. They can include land, buildings, machines, and cash. Liabilities are amounts owed by others to the company, such as payment owed by customers. These are called receivables. These include current and non-current assets.
- Current assets are things of the company that they can or use or sell in a year. Cash, stock and unpaid customer bills are examples.
- Non-current assets are long-term things, such as land, machines, tools, etc. These serve the company revenue for years.
- Total assets provide a picture of a firm’s financial might. If a company’s assets exceed its debts, chances are it’s a healthy business.
Liabilities
Liabilities are what the company needs to pay. This a generic term that includes loans, unpaid bills, salaries and other debts. Like assets, liabilities can be classified as current or non-current.
Current liabilities have a short time frame. These have to be paid within one year such as bills or wages.
- Long-term liabilities are known as our non-current liabilities. These include bank loans or bonds to be repaid over many years.
- Liabilities indicate whether the business has debt or is financially strong. If liabilities exceed assets, the company faces trouble.
Equity
Equity is the owner’s portion of the business. It is also known as shareholder equity. It tells how much money is owned by the owners by subtracting all debts. Equity arises from the money invested by the owners and the profits the company retains. This portion is explained further (along with others) in another financial statement called the statement of changes in equity.
On the company’s balance sheet the financial reporting elements provide an overview of what the company currently looks like. Interest investors and banks and money lending firms look for balance sheet first before making investment or giving loans. To give you an idea of what a balance sheet looks like, here’s a simple table:
| Balance Sheet Item | Example |
| Assets | Cash, Land, Machines |
| Liabilities | Loans, Bills, Salaries |
| Equity | Owner’s capital, Retained earnings |
Important Components of an Income Statement
The income statement also shows whether a business profit or loss in a given period. It is also known as a P&L statement. It addresses them all as elements of an income statement — revenue, expenses, net income, etc.
This is to help owners recognize how their business is doing. It factors in sales income and deducts expenses, such as rent, salaries and goods sold. The end figure is either a gain or a loss. It is one of the most important types of financial statements for this reason.
Revenue
Revenue refers to the money a company generates through sales of its products or services. Revenue may also be referred to as sales or turnover. This is the first line item of the income statement.
Revenue – A company with a lot of sales will have a lot of revenue. But big revenue does not equal big profit all the time. Progress depends on how much it spends.
Expenses
The costs of doing the business. That includes salaries, rent, electricity and raw material costs. If a business spends more than it makes, it will post a loss.
There are two kinds of expenses:
- Operating expenses: These are ongoing expenses such as rent and salaries.
- Indeterminate costs: These are non-recurring or atypical expenses such as penalty or lawsuit payments.
By having a better understanding of their expenses, this enables the company to assess where they can cut costs to improve their profit.
Net Income or Loss
This is the net profit after taking out expenses from revenue. If income exceeds expenses, the bottom line is net income. If expenditure increases, it becomes a net loss.
It allows a lucid picture of profit-making ability. It aids in planning and goal setting. It is used frequently by business owners and managers to monitor outcomes.
This statement will look something like this:
| Income Statement Item | Amount |
| Revenue | $100,000 |
| Operating Expenses | $60,000 |
| Non-operating Expenses | $5,000 |
| Net Income | $35,000 |
Now you flow through the income statement items in this manner. This also makes their statement one of the three main financial reporting elements.
Important Components of Cash Flow Statement
The cash flow statement has a great significance in trying to determine the actual financial well-being of the company. It details how much cash is coming in and how much is going out over a period. This report is the least read, but it is very important for everyone. A company cannot survive without sufficient cash even if it is profitable.
This report has three cash flow statement parts — operating, investing, and financing activities. The three sections detail how cash comes and goes within the business.
Statements of Cash Flows from Operating Activities
This section displays cash generated and consumed via day-to-day operations. It contains both money coming from sales and money going out of the business to cover costs such as raw materials and wages. Positive cash flow from operations indicates the business is functioning properly.
Cash Flow from Investing Activities
This section displays money spent or received from the purchasing and selling of large items such as real estate or machinery. If the company is purchasing more equipment, it means it is looking to expand.
Cash Flows from Financing Activities
This part talks about how a business gets funds from external sources. That includes bank loans, investor money and loan repayment. This report is divided into sections in which individuals can understand where the company earns money and how the company spends it. On the other hand, when cash is coming in reliably, it shows the business is healthy. This is the one of the most important parts of financial reports to prevent cash shortages. Cash flow statement is one of the parts of total financial statement structure. That picture is not complete without it.
Relevance to ACCA Syllabus
Financial reporting is among the important pillars in ACCA qualification. You should know many aspects of it in order to prepare and manage data and interpret them according to IFRS (International Financial Reporting Standards). It helps students with the preparation & projection & constructing financial statements in different sectors & this gives a substantial head start in stepping UP papers like FR, SBR & AAA.
Components Of Financial Statements ACCA Questions
Q1: Which of the following accounts for a company’s revenues and expenses over a period of time?
A) Balance Sheet
B) Income Statement
C) Cash Flow Statement
D) Balance Sheet
Ans: B) Income Statement
Q2: Where does the increase in retained earnings and issued share capital fit into the above?
A) Balance Sheet
B) Notes to Accounts
C) Fairness Adjustment Console (FAC)
D) Trial Balance
Ans: C) Statement of Change in Equity
Q3: Which part of this statement are you looking at to tell you about operating, investing, and financing activities?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Management Commentary
Ans : C) Cash Flow Statement
Q4: “Which of the following is NOT considered a financial statement component in accordance with IAS 1 components?”.
A) Auditor’s Report
B) Income Statement
C) Balance Sheet
D) Cash Flow Statement
Ans: A) Auditor’s Report
Q5: Balance sheet measure primarily what?
A) Revenues over a period
B) Profit after tax
C) A snapshot of finances at a single moment
D) Operational effectiveness
Ans: C) A financial position statement at a date
Relevance to Us CMA Syllabus
Which is also a part of Part 1 syllabus in US CMA, Financial Planning, Performance, and Analytics. The candidates should understand how the connection works within the statement like how the income statement connects to the balance sheet and cash flows probably for the better financial decisions, performance evaluation, and help in managerial planning.
Components Of Financial Statements CMA Questions
Q1: How do you tell whether or not the company made or lost any money?
A) Cash Flow Statement
Financial preceeds reports Hse 30 Oct 2023.
C) Income Statement
D) Statement of Changes in Equity / Retained Earnings Statement
Ans: C) Income Statement
Q2: What are the following sections called: assets, liabilities and equity?
A) Income Statement
B) Balance Sheet
C) Statement of changes in equity
D) Cost Sheet
Ans: B) Balance Sheet
Q3: Payments for equipment can be found in which section of the cash flow statement?
A) Operating Activities
B) Financing Activities
C) Investing Activities
D) Transactions Related to Retained Earnings
Ans: C) Investing Activities
Q4: Where does depreciation expense fit in?
A) Balance Sheet
B) Statement of Cash Flows
C) Income Statement
D) Notes to Accounts
Ans: C) Income Statement
Q5: From where do you get info on dividends paid?
A) Balance Sheet
B) Income Statement
C) Investing Cash Flow
D) Financing Cash Flows
Ans : D) Cash Flow from Financing Activities
Relevance to CPA Syllabus
Even if you are preparing for the US CPA, especially the FAR (Financial Accounting and Reporting) section, this goes for you too – having a good grasp over different components of financial statements under US GAAP is paramount. Candidates will have to analyse financial statements, make sense of the impact of transactions in them and explain the links between financial statements — all of which are essentials for audit and assurance work.
Components Of Financial Statements CPA Questions
Q1: Which financial statement do you ending final cash balance under US GAAP, among other?
A) Statement of Income
Business School Financial Statements (B) Statement of Retained Earnings
C) Balance Sheet
D) Statement of Cash Flows
Ans: D) Cash Flow Statement
Q2: What information does the statement of changes in equity provide?
A) Asset balances
B) Net cash flows
Ah) Change in owners equity accounts
D) debt and duty
Ans: C) Variation of the owner’s equity accounts
Q3: What Accounts Receivable and Inventory—
A) Income Statement
B) Cash Flow Statement
C) Balance Sheet
D) Statement of total changes in equity
Ans: C) SFP (Statement of Financial Position)
Q4: What do GAAP financial statements do not contain?
A) Unilateral Changes in equity Statement
B) Auditor’s Opinion
C) Income Statement
D) Balance Sheet
Ans: B) Auditor’s Opinion
Q5: What will be the appearance of dividends paid on the cash flow statement?
A) Operating Activities
B) Investing Activities
C) Financing Activities
D) Non-operating Items
Ans: C) Financing Activities
Relevance to CFA Syllabus
Financial Statements Analysis topic in the CFA Level 1 course The CFA Level 1 exam evaluates the candidate’s understanding of each element of financial statements, which play a vital role in assessing the financial condition of a company, estimating the value of an investment, and performing an equity analysis. So if you are looking for comprehension of how financials tie into valuation, and financial modeling, this is a must.
Components Of Financial Statements CFA Questions
Q1: What is the primary balance sheet component represented in income statement?
A) Cash position
B) Cash flows from operating, investing and financing activities
C) Revenues and expenses
D) Shareholder equity changes
Ans: C) Revenues and expenses
Q2: The statement says that if a firm have sufficient assets what is short-term to meet its liabilities?
A) Cash Flow Statement
B) Income Statement
C) Balance Sheet
D) Notes to Financials
Ans: C) Balance Sheet
Q3: Where will retained income be shown?
A) Income Statement
B) Position in Financial Statement
D) Statement of Changes in Equity
D) Cash Flow Statement
Ans: C) Changes in Equity Statement
Q4: The common practice is in financial analysis to show the liquidity of a company.
A) Statement of changes in equity
B) Income Statement
C) Balance Sheet
D) Trial Balance
Ans: a) Balance Sheet
Q5. Sprinting: What is the best characterization of operational efficiency as a function of time?
A) Balance Sheet
B) Income Statement
C) Cash Flow Statement
D) Footnotes
Ans: B) Income Statement
