Financial statements are summarized reports representing the financial position of a business at any particular date and representing the financial performance (profitability) of the business for a particular period. Usually, a complete set of financial statements has the following statements or components:
- Balance sheet
- Income statement
- Statement of comprehensive income
- Statement of changes in equity
- Statement of cash flows
- Notes to the financial statements
These components are briefly described below. Further details regarding each component are given in the coming chapters of this section.
Balance sheet is a financial statement that shows an entity’s financial position at a particular point in time. Balance sheet reports the amounts of assets, liabilities, and equity of an entity at any particular point in time.
Income statement is a financial statement that shows an entity’s financial performance during a particular period of time. Owners and potential investors are often most concerned about the profitability of the business and this statement provides the information about profitability of a business during a particular period of time.
Income statement reports the amounts of income and expenses of an entity during a particular period of time.
Statement of comprehensive income
Statement of comprehensive income is a financial statement that shows an entity’s total comprehensive income during a period which is made up of following two components:
- Net income or net profit (coming from the income statement)
- Other comprehensive income
Other comprehensive income consists of such income or losses that cannot be attributed to the management’s good performance or poor performance. Therefore, these are not included in the income statement and are represented separately in the statement of comprehensive income. Examples of some items included in the other comprehensive income are as follows:
- Revaluation surplus or loss on revaluation of fixed assets
- Unrealized gains or losses on FVOCI investments
- Foreign currency translation differences
Statement of changes in shareholders’ equity
Statement of changes in shareholders’ equity is a financial statement that shows the elements of an entity’s total equity and shows the movements in these elements during a particular period of time. For corporations, it is called shareholders’ equity, whereas for sole proprietors and partnership firms, it is called owners’ equity.
Some common components of equity are given below:
- Share capital or paid-up capital
- Share premium or discount on issuance of shares
- Retained earnings or accumulated losses
- Revaluation surplus
- Any other reserves such as Unrealized gains or losses on FVOCI investments
Statement of cash flows
Statement of cash flows is a financial statement that shows an entity’s significant cash inflows and outflows during a particular period of time. Some investors believe that cash is the real thing, and an entity’s performance can be evaluated by its performance in terms of net cash flows generated by the business. Similarly, various other analyses are done by users of the financial statements on the basis of statement of cash flows.