Financial Accounting: What Are Financial Statements?

Financial accounting is a particular branch of accounting in which the financial transactions of a company are kept track of. To record, summarize and present the transactions in a financial statement or financial report such as a balance sheet or an income statement, standardized guidelines are used. Wilks CPA can help you manage and maintain your financial statements.
The results of the financial position and operations of a company are presented in its financial statements. Typically, publicly-traded companies have four types of statements:

  • Balance sheet
  • Cash flow statement
  • Income statement
  • Statement of changes in equity

Balance Sheet

The balance sheet, also known as the statement of financial position, tells whether or not bills can be paid on time by a company. The balance also tells whether or not a company is financially flexible enough to obtain capital and will be able to distribute cash to the owners of the company in the form of dividends.

There are three items on top of a balance sheet, i.e. the title (e.g. statement of financial position or balance sheet); the entity’s legal name and the statements date. Significantly, the financial position is never for its owner but for the entity. This statement is for a particular point of time, rather than a date.

The assets, liability and equity of the shareholders of the company are presented in the balance sheet itself. The assets section of a balance sheet includes things such as accounts receivable, buildings, cash, equipment, inventory, and prepaid insurance. The liabilities of the company; are reported in the next section and often the title of liabilities have the word “payable” in them, such as Accounts Payable, Interest Payable Wages Payable, etc. The equity of stockholders is the final section of a balance sheet.

Cash Flow Statement

The cash flow statement tells of the uses and sources of cash during the period. Information about the investing as well as financing activities of the company during the period are also provided by it. Under the matching principal and accrual accounting, economic events are recorded by accountants no matter when cash is actually used or received. To generate cash flow statements, the revenues for the period are matched with the costs incurred. Additionally, apart from financial statements in which theoretical accounting entries are included, the actual cash disbursed and received during the period is what is of vital interest. In fact, the cash flow statement may be fundamentally important depending on the user and the company. The cash flow statement such as the income statement is for a certain period of time.

Income Statement

The income statement, which is also called the profit and loss statement or P&L statement, tells of both a business’s earnings and profitability. The income statement is for a particular period of time at all times, such as a year, a quarter or a month. These cut-offs are high-handed from a business perspective, and they lead to many problems when measuring income because the operations of a company are ongoing. Nonetheless, periodic income statements are necessary since comparing the result for the company to the results of other companies becomes possible using them. Depending on the industry, comparisons in which seasonable variables are eliminated year over year may be quite useful.

Statement of Changes in Equity

The changes in the equity of stockholders for the same period as the other financial statements is listed in the statement of changes in Equity. Items such as comprehensive income, dividends, exercise of stock options, net income, and the repurchase of common stock are included in these changes.

Merely a single sector in the field of business accounting is represented by financial accounting. Managerial accounting is another similar sector, in which financial information is provided to the management of a company. Generally, this information is internal and is mainly used by management when making decisions. Auditing, cost accounting and tax accounting are some of the other included sectors of the accounting field.

The key factor that distinguishes financial accounting from managerial accounting is the fact that the goal of financial accounting is to provide information to third-parties. On the other hand, the goal of managerial accounting is to provide information within the organization to managers so that they can make decisions. Financial statements are issued by companies on a routine schedule and this is why financial accounting is such an important part of accounting. If your business needs assistance with financial statements look no further! Call (405) 670-3150 today!

Call Andy Wilks CPA at (405) 670-3150