What are Financial Statements

What are financial statements?

Financial statements are a set of documents that show your company’s financial status at a specific point in time. They include key data on what your company owns and owes and how much money it has made and spent.

There are four main financial statements:

  • balance sheet
  • income statement
  • cash flow statement
  • statement of retained earnings

Financial statements may be prepared for different timeframes. Annual financial statements cover the company’s latest fiscal year. Companies may also prepare interim financial statements on a monthly, quarterly or semi-annual basis.

Interim statements sometimes include fewer components than year-end statements. For example, they may lack a cash flow statement and a statement of retained earnings.

Financial statements generally give information for both the latest period and the prior period to make comparisons easier. For example, a financial statement covering January 1 to December 31, 2021, would include the statements for both that year and the previous year—January 1 to December 31, 2020.

What are the elements of financial statements?

1. Balance sheet

The balance sheet shows what the company owns and how much it owes at the end of the period. It is based on the equation:

Assets = Liabilities + Shareholders’ Equity

Below is a sample balance sheet.

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2. Income statement

An income statement shows the profitability of your business. It details how much money your business earned and spent. The income statement is also sometimes referred to as a profit-loss statement or an earnings statement.

It shows your:

  • revenue from selling products or services
  • expenses to generate the revenue and manage your business
  • net income (or profit) that remains after your expenses

Below is an example of an income statement.

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To supplement an income statement, a business may also prepare a statement of comprehensive income. This reports revenues and expenses that haven’t yet been realized, such as unrealized gains or losses from:

  • financial investments
  • foreign currency adjustments
  • pension liabilities

3. Cash flow statement

The cash flow statement, sometimes called a statement of changes in financial position, shows how money has moved through your business during the period.

Here is an example of a cash flow statement.

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4. Statement of retained earnings

The statement of retained earnings shows the cumulative earnings of the business after any dividends or distributions to shareholders. As well, this statement, sometimes called a statement of changes in equity, also shows the change in the retained earnings account between the opening and closing periods on each balance sheet.

Sample retained earnings statement:

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5. Notes to the financial statements

Notes to the financial statements disclose the assumptions made in preparing the statements and help interpret and analyze the information. They typically explain:

  • Accounting policies, judgments and estimates involved in preparing the statements
  • Supplemental information about certain line items, such as:
    • a breakdown of accounts payable and receivable
    • a revenue breakdown by segment or region
    • remaining economic life of assets
  • Other important information, including:
    • risks to the business, such as


      risk or concentration risk

    • debt covenants
    • contingent liabilities
    • revenue and profit or loss of an acquired business or strategic investment
  • Whether the statements were prepared on a cash or accrual basis
  • Which accounting standards the company follows (e.g. International Financial Reporting Standards or Accounting Standards for Private Enterprises)
  • The type of financial statement (see below)