When we speak of financial statements, we are referring to a collection of statements (i.e., 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 (i.e., 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 expense. 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, several more statements may be used.

For more information on this topic, see the links listed below of articles posted on related Web sites.

Developing Statements

• Financial Statements – University of Maine Extension -- Financial statements usually include the balance sheet, income statement (sometimes called a profit or loss statement) and the cash flow statement. They are prepared from business records at the end of each accounting period, but they can also be done on a monthly or quarterly basis. Annual accounting periods usually represent a fiscal year or a tax year.
  
• The Essential Financial Tools for Running a Firm – University of Florida Extension -- The paper is intended to provide the owner of an agricultural firm with the essential financial tools for running the business.
  
• Developing a Set of Financial Statements – Small Business Notes -- To develop a set of financial statements, you have to start with a plan for how you will organize the information.
  
• Basic Rules for Financials – CCH business Owner’s Toolkit -- Before we launch into a discussion of the nuances of financial statements, you need to accept the fact that there are rules to putting these statements together.
  
• Accounting Procedures – CCH Business Owner’s Toolkit -- A major cause of distortions in the picture presented by financial statements and ratio analysis of the items in the statements is the different accounting procedures that may be used in arriving at the figures presented in the income statement and balance sheet.

Other Statements

• Statement of Changes in Financial Position – CCH Business Owner’s Toolkit -- This statement helps to explain how your company acquired its money and how it was spent.
• Statement of Changes in Equity – CCH Business Owner’s Toolkit -- This type of financial statement is used to bridge the gap between the amount of equity the owners have in the business at the beginning of the accounting period and the amount of their equity at the end of the period.
  
• Common Size Financial Statements – CCH Business Owner’s Toolkit -- An easy way to spot trends in your balance sheet and income statement data from a number of years, or to compare your information with that of another company or industry group, is to use "common size" financial statements.