Understanding financial statements: A beginner's guide

Oct 18, 2023

Understanding financial statements is crucial for any business owner, investor, or individual who wants to make informed financial decisions. Financial statements provide a snapshot of a company's financial health and performance. In this beginner's guide, we will cover the basics of financial statements and what they mean.

What are Financial Statements?

Financial statements are reports that provide information about a company's financial position, performance, and cash flows. They are prepared by companies at the end of each accounting period, typically quarterly or annually, to provide stakeholders with an overview of the company's financial health.

The Three Types of Financial Statements

There are three main types of financial statements:

  1. The Balance Sheet
  2. The Income Statement
  3. The Cash Flow Statement
balance sheet

Assets

Assets are resources that a company owns and can use to generate revenue. Examples of assets include cash, accounts receivable, inventory, and property, plant, and equipment.

Liabilities

Liabilities are obligations that a company owes to others. Examples of liabilities include accounts payable, loans, and taxes owed.

Equity

Equity represents the residual interest in the assets of a company after deducting liabilities. It is the amount of money that would be left over if a company sold all of its assets and paid off all of its liabilities.

The Income Statement

The income statement shows a company's financial performance over a specific period of time, typically a quarter or a year. It shows how much revenue a company generated, how much it spent on expenses, and how much profit it made.

income statement

Revenue

Revenue is the amount of money a company earned from selling goods or services. It is also called sales or turnover.

Expenses

Expenses are the costs a company incurs to generate revenue. Examples of expenses include salaries, rent, utilities, and advertising.

Profit

Profit is what is left over after deducting expenses from revenue. It is also called net income or earnings.

The Cash Flow Statement

The cash flow statement shows how much cash a company generated and spent during a specific period of time. It provides information about a company's cash inflows and outflows.

cash flow statement

Cash Inflows

Cash inflows are the sources of cash for a company. Examples of cash inflows include cash from sales, loans, and investments.

Cash Outflows

Cash outflows are the uses of cash for a company. Examples of cash outflows include payments for expenses, loans, and investments.

Net Cash Flow

Net cash flow is the difference between cash inflows and cash outflows. A positive net cash flow means a company generated more cash than it spent, while a negative net cash flow means a company spent more cash than it generated.

Understanding financial statements is essential for anyone who wants to make informed financial decisions. By understanding the basics of financial statements, you can gain insight into a company's financial health and performance.