Financial Statements
The financial statements are the primary means of communication between a company and its stakeholders. It allows them to make informed decisions about providing resources to the entity (e.g. investing, lending).
The benefits of providing finanical information should outweigh its costs.
The following are the required headers and footers for financial statements:
- Name of the company
- Title (type of statement)
- Specific date covered (At December 31, 2025)
- Unit of measure (In millions of dollars)
- Bottom: The notes are an integral part of the financial statements.
Some conventions for styling:
- Dollar sign for first and total amounts
- Line above sub-totals
- Double underline for totals
- Bracket s for negative numbers
A classified financial statement would break accounts into different classes (e.g. current / non-current A&L), whereas an unclassified financial statement would list all accounts in the same class together.
We can build financial statements by referencing your adjusted trial balance.
Relations between account types
The following equations are based on the definition of the individual items:
Retained Earnings = Revenue - Expenses
Assets = Liabilities + Equity
Equity = Retained Earnings - Dividends
Retained Earnings here is the Net income generated by the business, and what's left of it.
These relationships & equations are demonstrated in their respective financial statements:
Income Statement
Principle: RE = R - E
Reports profit / loss over a period of time. Income before / after taxes must be displayed separately
XYZ Corporation
Income Statement
For the Year Ended December 31, 2025
(In millions of dollars)
- Less: Credit card discounts(1)
- Less: Cost of goods sold(1)
- Supplies Expense$1
- Loss on sale of assets1
- Interest Revenue$3
- Dividend Expense1
The notes are an integral part of these financial statements. (Operating revenue can simplify be "Sales Revenue" as there is only one item, but expanded for clarity.)
- Operating R&E Income from operations
- Other Revenue / Expense Income before taxes
- Tax Expense Net Income & EPS
Statement of Stockholder's Equity
Principles:
Reports changes in stockholder's equity over a period of time.
XYZ Corporation
Statement of Stockholder's Equity
For the Year Ended December 31, 2025
(In millions of dollars)
| CS | RE | APC | Total | |
|---|---|---|---|---|
| Balance, January 1, 2025 | $50 | $100 | $2 | $152 |
| Net Income | -- | 25 | -- | 25 |
| Dividends | -- | (10) | -- | (10) |
| Stock Issuance | 20 | -- | 2 | 22 |
| Balance, December 31, 2025 | $70 | $115 | $4 | $189 |
The notes are an integral part of these financial statements.
Balance Sheet
Principle: A = L + E
The balance sheet is prepared after creating the Closing Entries.
Reports the financial position of a company at a specific point in time.
XYZ Corporation
Balance Sheet
At December 31, 2025
(In millions of dollars)
Assets
Current Assets:
- Cash and Cash Equivalents$14
- Accounts Receivable3
- Inventory7
Non-Current Assets:
- Property, Plant, and Equipment35
- Intangible Assets5
Liabilities and Stockholders' Equity
Current Liabilities:
- Accounts Payable$4
- Short-term Debt2
Non-Current Liabilities:
- Long-term Debt20
- Deferred Tax Liabilities5
Stockholders' Equity:
- Common Stock20
- Less: Treasury stock(4)
- Retained Earnings17
The notes are an integral part of these financial statements.
It is called a balance sheet because the left side (assets) is equal to the right side (liabilities + equity).
Cash flow statement
Cash flows
The following is a general way to categorize cash flows:
- Financing: Changes in shares, borrowing money or repayment of long term debt
- Investing: The purchase / sale of long-term assets that sit outside of the businessses' core operations
- Operating: Revenue generating activities of a business
An entry has no effect on cash flow if it doesn't involve cash.
The direction of cash flow: cash is debited (cash outflow) or credited (cash inflow).
Information needed for preparing cash flow statement
- Comparative balance sheets (showing current and previous years)
- Income statement
Preparing statement with indirect method
Principle: Calculate cash flows and check with the change in cash balance.
We generally use indirect method, which is more convenient to prepare. The only difference between the indirect and direct method is the operating activities section. We're just going to focus on the indirect method.
We can calculate the cash flow from operating activities by:
Which we will do inside the statement. The general steps to prepare the statement are:
- Calculate change and label type of cash flow (FIO) on the balance sheet, as well as for any additional information
- Identify the non-cash expenses (depreciation, amortization)
- Identify if there are any gains or losses on the sale of non-current assets
- Use the changes in [O] and reverse their effects on the cash flow statement
(e.g. ) - Fill in the rest
Note that we use payments and proceeds for financing activities to describe cash outflows and inflows, respectively.
XYZ Corporation
Statement of Cash Flows
For the Year Ended December 31, 2025
(In millions of dollars)
- Net Income$2
- Adjustments for non-cash items:
- Depreciation Expense1
- Amortization Expense1
- Loss on Sale of Equipment1
- Changes in current asset and liabilities:
- Increase in Accounts Receivable(1)
- Decrease in Inventory2
- Increase in Accounts Payable1
- Acquisition of businesses(5)
- Purchase of Equipment(5)
- Sale of Equipment2
- Issuance of Common Stock4
- Payment of Dividends(1)
- Payments on revolving line of bank credit(1)
- Purchases of treasury stock(1)
- Proceeds from stock issued under share-based compensation plans1
The notes are an integral part of these financial statements.
Order of creation
Note the importance of the order of creation of the statements as listed:
- Income Statement: Provides the Net Income
- Statement of Stockholder's Equity: Provides the Ending RE
- Balance Sheet: Provides the Ending A, L, E to compare with the previous year
- Statement of Cash Flows: