What Are the Four Financial Statements That Must Be Prepared for a Business Entity?

A business entity uses financial statements to communicate about its financial information with interested parties, including investors and creditors. Four financial statements must be prepared to provide detailed information about a business entity’s financial condition at given points in time and its financial performance during particular periods. The four financial statements cover subjects on everything from assets, liabilities, shareholders’ equity to net income and cash flows.

A balance sheet is a financial statement that lists the accounts and balances of a business entity’s assets, liabilities and shareholders’ equity. A business entity reports such financial information in its balance sheet at the end of an accounting period, providing a snapshot of its financial condition at that point in time. While assets represent an entity’s money uses, liabilities and shareholders’ equity constitute the entity’s money sources. Since assets are financed either by liabilities or by equity, total assets always equal the sum of liabilities and shareholders’ equity.

An income statement, sometimes referred to as the statement of profits and losses, reports a business entity’s various revenues, costs and expenses, as well as net income -- the principle element of an income statement. Thus, an income statement is a summary of a business entity’s financial performance during a given accounting period. An income statement normally is organized to cover operating activities, nonoperating activities such as investments, any discontinued operations, and any unusual and infrequent extraordinary events.

The statement of cash flows shows the cash inflows and outflows between a business entity and the outside world during an accounting period. While revenues and expenses reported in the income statement involve many cash transactions, they also include certain noncash exchanges. As a result, a business entity must prepare a separate statement to report only cash flows. In addition to operating activities, cash flows also come from investing activities and financing activities. For example, the sale of investment holdings and obtaining financing generate cash inflows, and the purchase of investments and paying off a debt result in cash outflows.

Shareholders’ equity represents the ownership interests of a business entity’s equity owners, mainly the owners’ contributed capital and the retained earnings that an entity has accumulated for its owners over the years. Although the amount of shareholders’ equity is reported in the balance sheet at the end of an accounting period, any changes in shareholders’ equity are not revealed by the balance-sheet reporting. The statement of shareholders equity is prepared to show the difference of shareholders’ equity between the beginning of an accounting period and the end of the period. For example, any income earned during a period is added to the beginning retained earnings to arrive at the end-of-period retained earnings.

1. Income Statement

2. Balance Sheet

3. Cash Flow Statement

4. Statement of Equity