Financial Statements

Financial statements are reports that are prepared based on recorded and summarized transactions. Financial statements are used by decision-makers to determine the performance and financial condition of a business. There are four basic financial statements:

• The income statement is a document that shows a company's revenues and expenses during a stated time period. It is sometimes called a statement of earnings.

• The statement of retained earnings is a document that indicates the accumulation of profits that have been "retained" by, or reinvested in, the company.

• The balance sheet is a document that shows the financial position of the company at one moment in time. It is depicted in terms of the accounting equation accounts (assets, liabilities, and owners' equity).

• The statement of cash flows is a document that shows the sources (inflows) of cash receipts and the uses (outflows) of cash payments for the company during a stated time period. This statement will be discussed in later lessons as an indicator of the solvency of a company.