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

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