Financial statements are essentially the report cards for businesses. They tell the story, in numbers, about the financial health of the business.

Frequently Asked Questions
  • How are financial statements connected to each other?

    The information found on the financial statements of an organization is the foundation of corporate accounting. Data found in the balance sheet, the income statement, and the cash flow statement is used to calculate important financial ratios that provide insight on the company’s financial performance. The income statement provides deep insight into the core operating activities that generate earnings for the firm. The balance sheet and cash flow statement, however, focus more on the capital management of the firm in terms of both assets and structure.

  • What’s the difference between a cash flow statement and an income statement?

    The cash flow statement and the income statement are two of the main financial statements. The cash flow statement is linked to the income statement by net profit or net loss, which is usually the first line item of a cash flow statement, used to calculate cash flow from operations. A cash flow statement shows the exact amount of a company's cash inflows and outflows over a period of time. The income statement is the most common financial statement and shows a company's revenues and total expenses, including noncash accounting, such as depreciation over a period of time.

  • Do dividends go on the balance sheet?

    There is no separate balance sheet account for dividends after they are paid. However, after the dividend declaration but before actual payment, the company records a liability to shareholders in the dividends payable account. After cash dividends are paid, the company's balance sheet does not have any accounts associated with dividends. However, the company's balance sheet size is reduced, as its assets and equity are reduced.

  • Why do shareholders need financial statements?

    Financial statements are essential since they provide information about a company's revenue, expenses, profitability, and debt. Shareholders need financial statements to make informed decisions about their equity investments, especially when it comes time to vote on corporate matters. There is no one indicator that can adequately assess a company's financial position and potential growth, which is why important metrics (along with many others) are calculated using the figures released by a company on its financial statements.

  • Does the balance sheet always balance?

    A balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities and shareholders' equity every time. The assets on the balance sheet consist of what a company owns or will receive in the future and which are measurable. The major reason that a balance sheet balances is the accounting principle of double entry. This accounting system records all transactions in at least two different accounts, and therefore also acts as a check to make sure the entries are consistent. If the balance sheet you're working on does not balance, it's an indication that there's a problem with one or more of the accounting entries.

Key Terms

Explore Financial Statements

Businessman Using a Mobile Device to Check Market Data
A Healthy Operating Profit Margin Defined
The Accounts Payable Turnover Ratio Shows How a Company Manages Debt
Business report on digital tablet
Writing and Reading an Annual Report
Cash Conversion Cycle (CCC): What Is It and How Is It Calculated?
Budgeting
Cash Flow From Financing Activities (CFF) Formula & Calculations
Days Sales of Inventory (DSI) Definition
Account, Accounting Concept
Diluted Earnings per Share (Diluted EPS): What You Should Know
Earnings Before Interest and Taxes (EBIT): How to Calculate with Example
What Is Gross Profit, How to Calculate It, Gross vs. Net Profit
Margin and Margin Trading Explained Plus Advantages and Disadvantages
Aerial cropped view of a person's arm writing on a clipboard containing financial data.
Net Operating Income (NOI): Definition, Calculation, Components, and Example
Property, Plant, and Equipment (PP&E) Definition in Accounting
What Is Present Value (PV)?
Return on Sales: What ROS Is and the Formula To Calculate It
Shareholder (Stockholder): Definition, Rights, and Types
Financial Analysis
Vertical Analysis: The Basics
The Difference Between Gross Profit Margin and Net Profit Margin
Business Woman Thinking Account
How Companies Calculate Revenue
Capitalization: The Whys and Hows
Chart of Accounts (COA) Definition: Examples and How It Works
Wooden silhouette of family under umbrella - Concept of Insurance
What Is a Contingent Liability?
Money and graph
What is Gross Income? Definition, Formula, Calculation, and Example
Turnover Definition
Price Weighted Average Stock Share Business Buy 3D Illustration
Weighted Average: What Is It, How Is It Calculated and Used?
a woman using a tablet
How to Decode a Company's Earnings Reports
Enterprise Multiple
Cash Flow
Free Cash Flow to the Firm (FCFF)
How to Evaluate a Company's Balance Sheet
Financial Data Analyzing
Why Is Other Comprehensive Income Important?
man in a suit looking at papers while at a table with water and espresso in front of him
Extraordinary Items vs. Nonrecurring Items: What's the difference?
a laptop screen showing charts and a person's hand holding a paper with numbers
How Is a Cash Flow Statement Different From an Income Statement?
The Three Major Financial Statements: How They're Interconnected
Balance Sheet
Balance Sheet vs. Cash Flow Statement: What's the Difference?
Fixed Asset vs. Current Asset: What's the Difference?
Gross, Operating, and Net Profit Margin: What's the Difference?
looking up at a skyscraper with a neoclassical bank in front of it
Bank Capital
Understanding a Common Size Financial Statement
financial graph on technology abstract background
Understanding Contributed Capital
How the Total Value of Goods Affect the Current Account Deficit
How Net Debt Is Calculated and Why It Matters to a Company
Non-Cash Item Definition
Working Capital: Formula, Components, and Limitations
close up of man hand analyzing stock market chart
Lower of Cost or Market Method
The Difference Between Goodwill and Other Intangible Assets: What's the Difference?
Expenditures
The Difference Between Recurring and Non-Recurring Expenses
a man in a wood workshop looking at his phone
Overhead vs. Operating Expenses: What's the Difference?
How the Capitalized Lease Method Works
man looking at financial statements on his desktop monitor in a home office
The Main Focus Points When Analyzing a Balance Sheet
How Do You Read a Balance Sheet?
Compiled vs. Certified Financial Statements: What's the Difference?
Why Do Shareholders Need Financial Statements?
Business woman thinking account
How Financial Accounting Differs From Managerial Accounting
Assets
How Does Goodwill Affect Financial Statements?
Stock exchange graph and numbers
Is an Increase in a Company's Capital Stock a Bad Sign?
Do Capital Expenditures Immediately Affect the Income Statement
a notepad, tablet, pen, and papers with graphs, on a table
What Are the Differences Between EBITDA, EBITDAR, and EBITDARM?
financial statement, pen and calculator
Single-Step vs. Multiple-Step Income Statements: What's the Difference?
What Is Incremental Cost
What Is "Scrubbing" Items on an Income Statement?
Are Subsidiaries Included in Company Statements?