What kind of financial statements that shows the assets liabilities and capital of the business?

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Overview of the Three Financial Statements
How are These 3 Core Statements Used in Financial Modeling?
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A financial statement is a report that shows the financial activities and performance of a business. It is used by lenders and investors to check a business’s financial health and earnings potential.

Financial statements can cover any period of time, although they’re most commonly prepared at the end of a month, a quarter, or a year.

There are four basic financial statements in accounting:

1. Balance sheet: A snapshot of your business’s financial condition at a single point in time, it shows what you own (your assets) vs what you owe (your liabilities). The difference between the two is often used as a starting point for valuing a business.

2. Profit and loss statement: Also called an income statement, this report shows your business’s revenues and expenses. Expenses are subtracted from revenues to show your business’s profit or loss figure, also known as net income.

3. Cash flow statement: Also called a statement of cash flows, this report shows changes to the cash coming in and out of your business over a period of time. It only records cash (which may not be all of your income), and includes amounts received from lenders and investors. A cash flow statement shows whether you can cover short term expenses like bills and payroll.

4. Statement of changes in equity: Also called a statement of owner's (or shareholder’s) equity, or statement of retained earnings, this report shows how much money your business keeps (rather than pays out to shareholders or owners). Often, these retained earnings are used to make debt payments or are reinvested in the business.

Combined, these statements provide a good view of the financial health of your business.

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.

Overview of the Three Financial Statements

1. Income Statement

Often, the first place an investor or analyst will look is the income statement. The income statement shows the performance of the business throughout each period, displaying sales revenue at the very top. The statement then deducts the cost of goods sold (COGS) to find gross profit.

From there, gross profit is impacted by other operating expenses and income, depending on the nature of the business, to reach net income at the bottom – “the bottom line” for the business.

Key features:

Shows the revenues and expenses of a business
Expressed over a period of time (i.e., 1 year, 1 quarter, Year-to-Date, etc.)
Uses accounting principles such as matching and accruals to represent figures (not presented on a cash basis)
Used to assess profitability

2. Balance Sheet

The balance sheet displays the company’s assets, liabilities, and shareholders’ equity at a point in time. The two sides of the balance sheet must balance: assets must equal liabilities plus equity. The asset section begins with cash and equivalents, which should equal the balance found at the end of the cash flow statement.

The balance sheet then displays the ending balance in each major account from period to period. Net income from the income statement flows into the balance sheet as a change in retained earnings (adjusted for payment of dividends).

Key features:

Shows the financial position of a business
Expressed as a “snapshot” or financial picture of the company at a specified point in time (i.e., as of December 31, 2017)
Has three sections: assets, liabilities, and shareholders equity
Assets = Liabilities + Shareholders Equity

3. Cash Flow Statement

The cash flow statement then takes net income and adjusts it for any non-cash expenses. Then cash inflows and outflows are calculated using changes in the balance sheet. The cash flow statement displays the change in cash per period, as well as the beginning and ending balance of cash.

Key features:

Shows the increases and decreases in cash
Expressed over a period of time (i.e., 1 year, 1 quarter, Year-to-Date, etc.)
Undoes accrual accounting principles to show pure cash movements
Has three sections: cash from operations, cash used in investing and cash from financing
Shows the net change in the cash balance from the start to the end of the period

	Income Statement	Balance Sheet	Cash Flow
Time	Period of time	A point in time	Period of time
Purpose	Profitability	Financial position	Cash movements
Measures	Revenue, expenses, profitability	Assets, liabilities, shareholders' equity	Increases and decreases in cash
Starting Point	Revenue	Cash balance	Net income
Ending Point	Net income	Retained earnings	Cash balance

How are These 3 Core Statements Used in Financial Modeling?

As explained above, each of the three financial statements has an interplay of information. Financial models use the trends in the relationship of information within these statements, as well as the trend between periods in historical data to forecast future performance.

The preparation and presentation of this information can become quite complicated. In general, however, the following steps are followed to create a financial model.

Line items for each of the core statements are created. It provides the overall format and skeleton that the financial model will follow
Historical numbers are placed in each of the line items
At this point, the creator of the model will often check to make sure that each of the core statements reconciles with the data in the other. For example, the ending balance of cash calculated in the cash flow statement must equal the cash account in the balance sheet
An assumptions section is prepared within the sheet to analyze the trend in each line item of the core statements between periods
Assumptions from existing historical data are then used to create forecasted assumptions for the same line items
The forecasted section of each core statement will use the forecasted assumptions to populate values for each line item. Since the analyst or user has analyzed past trends in creating the forecasted assumptions, the populated values should follow historical trends
Supporting schedules are used to calculate more complex line items. For example, the debt schedule is used to calculate interest expense and the balance of debt items. The depreciation and amortization schedule is used to calculate depreciation expense and the balance of long-term fixed assets. These values will flow into the three main statements

More Resources

We hope this has been a helpful overview for you of the 3 financial statements. Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To continue learning, explore these additional CFI resources: