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Financial statements are reports a business prepares to summarize its economic and financial status over a specific period. You can also hear them called accounts, especially in Europe. They bring together the numbers that explain what the company owns, what it owes, what it earned, and how cash moved.

You use financial statements to understand performance and financial position without digging through every transaction. They give you a consistent way to review results over time.

They also help different stakeholders speak the same language: Leadership, investors, analysts, lenders, and teams making day-to-day decisions.

Key takeaways

– Financial statements summarize assets, liabilities, equity, revenues, expenses, and cash flow in a standardized format.

– The core statements are the balance sheet, income statement, statement of changes in equity, and statement of cash flows.

– Many companies also publish an annual report or notes that explain and expand what the core statements show.

– Financial statement analysis helps you interpret the reports to assess liquidity, solvency, profitability, and risk.

What is a financial statement?

So, what is a financial statement? The simplest answer is that it’s a formal report that shows a company’s financial standing and results for a defined period.

A single financial statement is usually one report (like an income statement). Most of the time, people refer to financial statements as a set of reports that work together.

The goal is clarity and comparability. You should be able to look at the same company over time, or compare companies, and understand the basics without rewriting the rules each time. This is an essential for strategic planning in your business, especially if you’re looking for a career in entrepreneurship.

What are financial statements used for?

Financial statements exist to support decisions. They turn activity into information you can act on.

You’ll use them to answer practical questions: Is the company stable? Is it generating cash? Can it pay its obligations? Is it improving or sliding back?

They also help you communicate. Whether you’re updating leadership, presenting to investors, or reviewing a project budget, financial statements give you a shared reference point.

Why are financial statements important?

They give you a structured view of financial health. That matters for investment decisions, financing decisions, and operational decisions.

They also let you track performance across time. A single period can be misleading. Financial statements help you spot trends in revenue, costs, debt, and cash.

Finally, they create accountability. When reporting follows consistent standards, it becomes easier to question assumptions and verify what is driving results.

What are the main elements of financial statements?

Most organizations use a core set of statements, plus supporting documents that explain the numbers. Here are the main pieces you need to know.

1) What is a balance sheet?

The balance sheet shows a company’s assets, liabilities, and equity at a specific point in time. It helps you judge solvency and financial strength on that date.

Assets are what the company controls and expects to benefit from. They’re often grouped into current assets (short-term, tied to the operating cycle) and non-current assets (long-term).

Equity and liabilities explain how those assets are financed: through the company’s own capital (equity) or through obligations (liabilities), usually split into current (short-term) and non-current (long-term).

2) What is an income statement?

The income statement shows revenues, expenses, and net income over a period, often a fiscal year. You may also see it called the statement of profit and loss.

It breaks down how the company generated revenue and what it spent to operate. This is where you evaluate profitability, cost structure, and operating performance.

Common components include revenue (operating and non-operating), costs and expenses (fixed and variable), and the resulting profit or loss. Some companies also segment results by product, region, channel, or customer group.

3) What is the statement of changes in equity?

The statement of changes in equity explains how equity changed during the period. It helps you understand what moved the company’s financial structure, not just where it ended up.

It typically includes items like owner contributions, retained earnings, dividends, and other adjustments that affect equity.

Use it to see how decisions and performance flow into shareholder value over time, and to confirm that the equity story matches what you see on the balance sheet and income statement.

4) What is the statement of cash flows?

The statement of cash flows shows how cash moved in and out of the company during the period. It focuses on liquidity and the ability to fund operations and obligations.

It is usually split into three sections: operating, investing, and financing activities. That structure helps you see whether cash is coming from the core business, asset sales, new borrowing, or other sources.

Use it to check whether the company can generate cash, maintain solvency, and finance growth without relying on fragile funding.

5) What is the company’s annual report or notes?

Many companies publish an annual report or a set of notes that explain and supplement the core statements. This is where you find the context behind the totals.

These documents often include accounting policies, post-closing events, explanations of specific line items, and other disclosures needed for transparency and good business ethics.

If something looks odd in the numbers, this is usually the first place to look for the reason.

How do the main statements fit together?

Each statement answers a different question, but they connect. It’s important to know the difference, as flawed financial statements can be fatal in business negotiations.

The income statement tells you whether the company generated profit over the period. The cash flow statement tells you whether it generated cash, and where cash came from and went.

The balance sheet shows the end-of-period position: what the company has and owes. The statement of changes in equity explains how equity moved between the start and end of the period.

What is a financial statement example?

Here’s a simple financial statement example using a fictional company. It’s simplified on purpose so you can see the structure.

Example: Income statement (Year 2025)

– Revenue: $1,000,000

– Cost of goods sold: $600,000

– Gross profit: $400,000

– Operating expenses: $250,000

– Operating profit: $150,000

– Taxes and interest: $50,000

– Net income: $100,000

Example: Balance sheet (Dec 31, 2025)

Assets

– Cash: $120,000

– Accounts receivable: $80,000

– Inventory: $100,000

– Equipment (net): $300,000

– Total assets: $600,000

Liabilities

– Accounts payable: $90,000

– Short-term debt: $60,000

– Long-term debt: $150,000

– Total liabilities: $300,000

Equity

– Share capital: $100,000

– Retained earnings: $200,000

– Total equity: $300,000

That matches the balance sheet logic: Assets ($600,000) = Liabilities ($300,000) + Equity ($300,000).

What is financial statement analysis?

Financial statement analysis is how you turn reports into decisions. You use it to evaluate financial health, spot strengths and weaknesses, and understand risk.

It supports better decision-making, from budgeting and hiring to investment and financing choices.

It also helps you detect opportunities and threats. Trends in cash, margins, working capital, or leverage often show up in the statements before they show up in headlines.

What financial statement analysis helps you do

1. Evaluate the economic situation: liquidity, solvency, profitability

2. Make informed decisions: resource allocation, pricing, cost control, investment choices

3. Spot risks early: cash pressure, rising debt, margin erosion

4. Plan effectively: set realistic goals and track progress against them

A simple way to approach analysis

1. Start with the question you need answered (cash, growth, stability, efficiency).

2. Compare at least two periods so you can see direction, not just a snapshot.

3. Check the cash flow statement to confirm what profit is actually turning into cash.

4. Use a small set of ratios tied to your question (liquidity, leverage, margins).

5. Read the notes if something looks inconsistent or unusually volatile.

    Common FAQs to wrap things up

    Are financial statements the same as accounts?

    Often, yes. “Accounts” is a common way to refer to financial statements in many markets.

    Do you need all financial statements to understand a company?

    You can learn a lot from the income statement and cash flow statement, but you get a clearer view when you read the full set together.

    Why can a company be profitable but still run out of cash?

    Profit includes non-cash items and timing effects. Cash flow shows what actually moved in and out during the period.

    What should you read first?

    If you care about stability, start with cash flow and the balance sheet. If you care about performance, start with the income statement, then validate with cash flow.