Financial Statements
What are Financial Statements?
Financial statements are reports that show financial information about the business.
![fs1](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs1.jpg)
How They Work
Income Statement
At the end of each accounting period, a business will prepare an income statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs2.jpg)
The information for the income statement comes from the income and expense accounts.
![fs3](https://seeaccountingnow.online/wp-content/uploads/2021/06/fs3.jpg)
These accounts show how much the business earned from operations during the period.
![fs4](https://seeaccountingnow.online/wp-content/uploads/2021/06/fs4.jpg)
Then they show how much the business spent on operating the business each month.
![fs5](https://seeaccountingnow.online/wp-content/uploads/2021/06/fs5.jpg)
When complete, the income statement will show how the business performed during the period.
![fs6](https://seeaccountingnow.online/wp-content/uploads/2021/06/fs6.jpg)
Balance Sheet
A business will also prepare a balance sheet at the end of each accounting period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs8.jpg)
In the days of manual accounting systems, the balance sheet was used as a period-end checking tool.
![fs9](https://seeaccountingnow.online/wp-content/uploads/2021/06/fs9.jpg)
When preparing an income statement manually, it was easy to make a mistake.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs10.jpg)
To make sure the income statement was correct, you transferred profit to the retained earnings account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs11.jpg)
After this, you prepared a balance sheet.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs12.jpg)
If the balance sheet balanced, it showed net profit was correct.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs13.jpg)
This check is no longer necessary.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs14.jpg)
Your computer will ensure the whole system is always in balance.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs15.jpg)
Despite this, the balance sheet is still used today.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs16.jpg)
It is used by management, investors, and lenders to show how much the business owns verses what it owes.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs17.jpg)
Cash Flow Statement
A business may also prepare a cash flow statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs18.jpg)
The statement is divided into three sections.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs19.jpg)
In each section, the statement shows where cash came from.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs20.jpg)
And it shows where the cash was used, or where it went.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs21.jpg)
The difference shows if cash flow was positive or negative in that area.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs22.jpg)
This will be shown for each section.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs23.jpg)
The statement will show the total of all sections.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs24.jpg)
This helps management and analysts determine if the business has sufficient funds available to meet its short term obligations.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/fs25.jpg)
© R.J. Hickman 2020