When we speak of financial statements we are referring to a collection of statements (ie. income statement, net worth statement, etc.) that provide information on the past and projected financial condition of the business.

For example, the income statement provides a monetary record of the income, expenses and resulting profit for a business over a period of time (ie. 12 months).  This is known as profitability and measures the viability of the business.

The net worth statement (balance sheet) provides a monetary record of the assets (what is owned), liabilities (what is owed) and the resulting net worth (assets less liabilities) of a business at a specific point in time.  This is known as solvency and measures the ability of the business to absorb losses.  If these statements are used to project future profitability or solvency they are called pro forma statements.

The cash flow statement is a monetary record of the cash inflow, cash expenditures and resulting net cash flow for a business over a period of time (ie. 12 months).  This is known as liquidity or cash management and measures the availability of cash in the business.

The cash flow statement is different from the income statement.  Although many of the recorded items are the same, several are different.  For example, borrowing money is cash inflow to the business by not income.  Likewise, repaying debt is a cash expenditure but not a cash expense.  Capital purchases are a cash expenditure but not an expenses.  Conversely, depreciation is an expense but not a cash expenditure (you don’t write a check for depreciation).  If the cash flow statement is used to project future cash flows it is usually referred to as a cash flow budget.

A financial ratio is the relationship between various line items on a financial statement.  Ratios are used to provide a quick indication of the financial viability of a business and are often compared to the ratios of other companies or industry standards.  For example, total debt divided by total assets is the debt-to-asset ratio and provides an indicator of solvency.

In addition to the typical financial statements described above, there are several more statements that may be used.

More information on financial statements is provided in the box at the right.