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Understanding the 3 Essential Financial Statements for Financial Reporting

 

Financial reporting is essential for disclosing a business’ financial status to potential investors, current shareholders, the government and more. It helps companies attract investors, stay solvent and avoid audits.

A financial report consists of three main financial statements: the balance sheet, the income statement (i.e. profit and loss statement) and the cash flow statement.


Balance Sheet
Income Statement
Cash Flow Statement



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1. Balance Sheet




The balance sheet accounts for a business’ net worth over a specified period of time. It reflects the company’s assets, liabilities and owners’ equity.

Ideally, when the sum of liabilities and owners’ equity are combined, the amount should match the sum total of the company’s assets.

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2. Income Statement




The income statement accounts for a company’s income and expenses over a specified period of time. It reflects your past financial activities and calculates your net income or net loss.

The easiest way to calculate your income is to subtract the subtotal of expenses and losses from the subtotal of revenues and gains. A positive number is your net income, whereas a negative number reflects a net loss.

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3. Cash Flow Statement



Cash flow statements can be used to account for cash from operating activities, investing activities and financial activities.

The cash flow statement records the amount of cash and cash equivalents (i.e. assets readily convertible to cash) entering and exiting a company. It shows where money comes from and where it’s being spent.

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