Business, studying finance, or preparing for exams requires understanding of the types of financial statements. Financial statements are the reports that summarize the financial performance and position of a business. These reports inform people how much money the business makes, how it spends money, what it owns and what it owes.
What are 5 types of financial statements? The key financial statements are:
- Income Statement
- Balance Sheet
- Cash Flow Statement
- Related Party Transactions Statement of Changes in Equity
- Notes to Financial Statements
They are the major types of financial statements. These reports contribute towards presenting a full financial picture. People look at these too, but they use tools to understand them. These are known as kinds of financial statement analysis. That includes checking trends, and comparing numbers with ratios.
You might be asking, how many types of financial statements are there? Some people include four or five if you count the notes section. But in broadly there is agreement on the four types of financial statements as the principal ones.
This article will explain:
- What financial statements are
- Four types of financial statements
- Why they matter
- What is the manner of financial statements analysis
- How to read and use them
Let’s take a deep dive into all types of financial statements in the simplest form.
What is a Financial Statement?
Written instruments are financial statements. They reflect the business activities and financial performance of a company. These reports are generated on a monthly, quarterly, or yearly basis. Such statements allow all parties, from business owners to investors, to proceed with knowledge.
They contain critical information, such as how much a company makes, spends, saves and owes. The rules for these records have to follow some rules. This way it ensures that everyone interprets them the same.
This is a common question asked by many people, What are types of financial statements analysis? These are the tools that people use to help understand the reports. However, before we get into that, we need to recognize the different types of financial statements available.
All businesses, regardless of size, must write these statements. Well, even students and professionals must have a thorough understanding of them. The knowledge of the three types of financial statements or even the five types of financial statements makes it easy to take the best decision.
In summary, financial statements:
- Use numbers to tell the story of a business
- Show profits and losses
- Reveal how money moves
- Help make better choices
Four Types of Financial Statements
There are four types of financial statements that most companies prepare. These statements include income details, balance sheet, cash flow statement and change in equity. A chapter of each financial story reveals.
Income Statement
The income statement, also known as the profit and loss statement, is a description of how much money a company earns and how much it spends during a given period. It also tells the company whether it made a profit or loss.
It usually includes:
- Revenues (Money coming in from selling products/services)
- Cost of goods sold (the cost of production)
- Gross profit
- Operating expenses (rent, salaries, etc.)
- Net profit (the final amount after all expense)
This statement addresses key questions such as:
- Is the company profitable — or losing money?
- Are sales growing?
- Are expenses too high?
An income statement helps to know types of financial statements. Trends in income and expenses help in the examination of the balance statements.
Balance Sheet
It shows what the company owns and what it owes.
It follows this formula:
Assets = Liabilities + Equity
Assets are what the company has, such as cash, buildings or equipment.
Liabilities refers to what the company owes to other people, like loans, unpaid bills, etc.
Equity is what the owners have in the business.
This is a very useful statement when someone asks you, what are 5 types of financial statements? And the balance sheet is always on the list.
It helps answer:
- Just how strong is the company’s financial ranking?
- Can it afford to pay its debts?
- How much is the company worth?
Cash Flow Statement
Statement of Cash Flows: This statement shows cash entering and leaving the business. It divides cash activities into three sections:
- Operating Activities (day-to-day business)
- Purchase of investments (both buying and selling assets)
- Debt or equity funding activities
Unlike income details, where non-cash items are also included, such as depreciation, cash flow details only addressed real cash. This statement helps:
- Know whether the business has enough cash to operate
- See where the cash is going
- Schedules or invest upcoming payment
It’s one of four types of financial statements that reflect the real-time shifting of cash.
Debt or equity funding activities
Statement of Changes in the Equity
This report indicates the changes in ownership’s equity over time. Equity is then adjusted as a result of profit, loss, investment, or withdrawal.
It includes:
- Opening equity
- Accretions (e.g. profits or new capital)
- Debits (as in losses or withdrawals)
- Closing equity
In fact, this is often the statement that novices will skip entirely, though it is critical for understanding when ownership changes hands. That’s what makes it one of the major types of financial statements.
Most people always get confused with Balance Sheet, but this statement shows more detailed changes in ownership value.
Why Preparing Financial Statements is Important?
Therefore, now that we know the types of financial statements, it is important to understand why they are important. All businesses, no matter what size, need to maintain their finances. These statements help in doing so.
What Are Financial Statements and Why Are They Important?
They help:
- To know business growth and loss
- Make informed decisions
- They want investors or banks to loan them money
- You can’t operate without following laws and the guidelines created by the government
- Compare with other businesses
A company must know whether it is doing well or poorly with statements. They provide an explicit snapshot in straightforward numbers.
How many types of financial statements are there? The answer is always four or more. Some also count notes to accounts as the fifth.
These statements also assist with:
- Budgeting and forecasting
- Business planning
- Tax calculations
There are a variety of different types of financial statements, each with its own purpose.
For example:
Income Statement Tells You Whether a company is profitable
We have seen the importance of Balance Sheet and how it reflects financial stability of the company
The Cash Flow Statement to be able to pay its invoices
Equity Statement shows the owner’s incremental equity production
So, these reports hardly represent information-less statistics. They are tools for growth.
Types of Financial Statements Analysis
When you have the reports, you have to read them and then do financial statement analysis. You do your due diligence on the reports using tools and methods.
Horizontal Analysis
It is a time-series analysis of financial execution. You can look for trends, like increasing sales or falling profits.
Example:
Verify and contrast the income for last year and the current year.
Vertical Analysis
This technique shows each item as a percentage of a total.
For example, all expenses are expressed as a percentage of total sales.
This helps answer:
- How much of sales goes into salaries?
- Are costs too high?
Ratio Analysis
Ratios help compare numbers. You can check:
- Profitability (such as net profit margin)
- Current ratio (liquidity)
- Efficient ( for example inventory turnover )
These analysis tools help in:
- Detecting problems early
- Improving performance
- Making better plans
So once you realise the types of financial statements, you also need to understand to use them well.
Relevance to ACCA Syllabus
Knowing about financial statements is very important in ACCA, it is part of papers like Financial Accounting (FA) and Financial Reporting (FR). ACCA students will prepare, interpret and analyse these statements in accordance with IFRS.
Types of Financial Statements ACCA Questions
Q1: Which is the component of financial statements that show as the date.
A. Cash Flow Description
B. Income details
C. Balance sheet
D. Details of profit
Answer: c. Balance sheet
Q2: Which statement includes changes in equity?
A. Expenditure only
B asset purchase
C. Equity change of owner
D. debt repayment
Answer: B. Owner’s equity
Q3: Which option tells us about income?
A. Cash Description
B. Financial Status Information
C. Income Details
D. Financial Summary
Answer: B. Financial Status Information
Q4: Those who use IFRS must provide a full set of financial statements with complete disclosure.
A. Cash Flow Description
B. Changes in equity details
C. Notes
D. Trial balance
Answer: D. Trial balance
Q5: Financial details give which of the following useful information to
A. only competitor
B. Government agencies only
C. User within and outside the organization
D. authorities charging tax
Answer: c. Internal and external user
Relevance to US CMA Syllabus
Under Part 1: Financial Planning, Performance and Analytics, the US CMA syllabus incorporates concepts related to understanding and analyzing all sorts of financial statements for business decision-making and budgeting.
Types of Financial Statements US CMA Questions
Q1: Which is the best statement to access operational efficiency?
A. Balance Sheet
B. Statement of Equity
C. Cash Flow Statement
D. Income Statement
Answer: D. Income Statement
Q2: Where do we find the net cash from Rajiv Co. from the operating activities?
A. Balance Sheet
Proposal and The Terms of the Financial Position Statement
C. Cash Flow Statement
D. Statement of Equity
Answer: C.
Q3: What is not included in an Balance Sheet?
A. Assets
B. Revenues
C. Liabilities
D. Equity
Answer: B Revenues are not included in a Balance Sheet.
Q4: How do you know that equity is changing?
A. Depreciation
B. Inventory level
C. Owner Contribution and withdrawal
D. Only tax expenses
Answer: C. Contributions and withdrawals put change in equity.
Q5: What should be focused on when creating financial statements for internal analysis?
A. Only tax calculation
B. A History of Preparation
C. Only external reporting
D. Only profit estimation
Option B: historical comparison and planning
Relevance to US CPA Syllabus
The FAR (Financial Accounting and Reporting) portion of the CPA exam is the most comprehensive test of the preparation and analysis of all financial statements, including specific coverage of both US GAAP and IFRS standards.
Types of Financial Statements US CPA Questions
Q1: From this list, which one is not a main financial statement under US GAAP?
A. Account report
B. Cash Flow Description
C. Audit report
D. Bank coordination
Answer B: Cash flow statement
Q2: What type of account does the details for financial posts typically show?
A. Revenue
B. Expenditure
C asset
D. Cost of sales
Answer: c. Asset
Q3: Cash paid for equipment is shown under which?
A. Operating activities
B. Investing activities
C. Financing activities
D. Retained earnings
Answer: C. financing activities
Q4: All are included in statement of change in the equity except
A. Dividents
B. Net Income
C. Equity financing
D. Cash balances
Answer: D. Cash balances
Q5: Which of the following shows a company financial position over a period of time?
A. Cash Flow Description
B. P & L Income Details is unchanged
C. Balance sheet
D. Testing balance
Answer: c. Balance sheet
Relevance to CFA Syllabus
In the Financial Reporting and Analysis section in CFA, the most important concepts of the specific accounting policies.
Types of Financial Statements CFA Questions
Q1: Which statement is useful for determining future cash inflow?
A. Income Details
B. cash flow statement
C. Balance sheet
D. statement of equity
Answer: B: Cash Flow Description
Q2: Which report depicts income and expense of business?
A. Balance Sheet
B. Cash Flow Description
C. Income Details
D. Equity details
Answer: C. Income details
Q3 What does the statement display of cash and cash equivalents?
A. Statement of cash flow
B. Profit and loss statement
C. Balance sheet
D. Classification of change in stockholders equity
Answer: C balance sheet statement
Q4: The analyst will see in history to check dividend payout will see:
A. Change in equity description
B. Cash flow details
C. Balance sheet
D. Trial balance
Answer: A. It can be seen on the statements of changes in equity.
Q5: Which of the following is not required by IFRS statement.
A. Balance Sheet
B. Cash flow details
C. Income Summary Details
D. Details of change in equity
Answer: C. Income summary details
