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What is a Financial Statement?

Explaining the main financial reports and what they reveal about a business

Written by Serena Santamaria
Updated over a month ago

Table of Contents


Definition

A financial statement is a formal record of the financial activities and position of a business, person, or other entity. It provides a summary of the financial performance and condition over a specific period. There are three main types of financial statements:

  1. Income Statement (Profit & Loss): Shows the company's revenues and expenses during a particular period, highlighting the net profit or loss. In other words it shows the profitability of a business.

  2. Balance Sheet: Provides a snapshot of the company's assets, liabilities, and shareholders' equity at a specific point in time. To simplify, it shows what the company owns and owes.

  3. Cash Flow Statement: Details the cash inflows and outflows from operating, investing, and financing activities over a period. Basically it helps to understand the business financial health and cash management.

These statements are crucial for stakeholders, such as investors, creditors, and management, to make informed decisions about the entity's financial health.

A Little Scheme to Clarify

Income Statement (Profit & Loss)

Balance Sheet

Cash Flow Statement

Formula:
​Net Profit = Gross Profit - Expenses

Formula:
​Total Assets = Total Liabilities & Equities

Formula:

Cash Flow = Cash from Operating Activities + Cash from Investing Activities + Cash from Financing Activities

Note: Gross Profit = Sales - Cost of Sales

Note: It refers to single point in time of a business's calendar year.

Note:

Cash from Operating Activities

Cash generated or used by the core business operations.

Cash from Investing Activities

Cash used for or generated from investments in long-term assets, such as purchasing equipment or selling investments.

Cash from Financing Activities

Cash flows related to borrowing, repaying debt, issuing stock, or paying dividends.


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