Financial Statements

The statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows represent a complete set of financial statements. These statements can be used in financial statement analysis to evaluate a company’s performance and financial position.

Financial statements summarize a company’s accounting information. These statements may be audited by independent, external auditors who then provide an opinion on whether or not the financial statements give a fair representation of the company’s performance and financial position under the accounting standards and principles.

The Statement of Financial Position

The statement of financial position is also referred to as the balance sheet or statement of financial condition. It gives a snapshot of a company’s financial position at a particular point in time. It discloses (i) the resources that a company has control over (its assets); (ii) a company’s obligations to its lenders and other creditors (its liabilities); and (iii) the excess of a company’s assets over its liabilities (its owner’s equity, shareholder’s equity, or owner’s residual interest in the company’s assets after deducting its liabilities).

The accounting equation, otherwise referred to as the balance sheet equation, expresses the relationship among the three components of the statement of financial position in the following form:

$$ \text{Assets} =\text {Liabilities} + \text{Owner’s equity} $$

The accounting equation must balance – a company’s total assets must at all times equal the sum of its liabilities and owner’s equity.

The Statement of Comprehensive Income

The statement of comprehensive income can be presented as a single statement of comprehensive income. Alterantively, it can be presented as two statements: an income statement and a statement of comprehensive income. In this instance, the statement commences with the profit or loss figure that is derived from the income statement and then presents components of other comprehensive income.

The income statement is also known as the statement of operations or profit and loss (P&L) statement. It provides information on the financial results of a company’s business operations over a specified period of time. Income statement shows the amount of revenue a company generated, how much expense it incurred, and how much profit or loss it made over the period of time.

The net profit or net income is also referred to as the bottom line or the income statement. It may be represented by the following equation:

$$ \text{Net income} = \text{Revenue} + \text{Other income} –
\text{Expenses} $$

Comprehensive income includes all items that can impact shareholder’s equity but do not result from transactions with shareholders. Some of these items are included in net income computation, while others are included as other comprehensive income.

The Statement of Changes in Equity

The statement of changes in equity is also referred to as the statement of changes in owners’ equity or statement of changes in shareholders’ equity. It provides information on the changes in owners’ investments in a company over time. Its main components are paid-in capital, retained earnings, and reserves. It is organized to present a beginning balance, ending balance, and increase or decrease during the reporting period for each component.

The Statement of Cash Flows

The statement of cash flows or cash flow statement discloses a company’s sources and uses of cash. It can assist in evaluating the company’s liquidity and solvency position. It classifies all the cash flows of a company into operating, investing, or financing cash flows.

Cash flows from operating activities include cash flows that arise from a company’s daily operations. Such cash flows determine net income. Cash flows from investing activities arise from activities that are associated with the acquisition and disposal of long-term assets, such as property and equipment. Cash flows from financing activities are derived from activities related to obtaining or repaying capital to be used in the company.

Question

A company’s sources and uses of cash can best be evaluated using the:

1. Statement of cash flows.
2. Statement of changes in equity.
3. Statement of comprehensive income.

Solution

The correct answer is A.

The statement of cash flows discloses a company’s sources and uses of cash.