Liabilities are debts you owe to other individuals, such as businesses, organizations, or agencies. Your liabilities can either be current (short-term) or noncurrent (long-term). Some examples of liabilities include accounts payable, accrued expenses, and long-term loan debt.

• After you generate your final financial statement, use your statements to track your business’s financial health and make smart financial decisions.
• For example, comparative income statements report what a company’s income was last year and what a company’s income is this year.
• Expenses could be various operating costs, like inventory, rent, or utilities.
• If they don’t, your balance sheet is unbalanced, and you need to find what’s causing the discrepancy between your assets, liabilities, and equity.
• Basically, your cash flow statement shows you how much cash flows in and out of your business.

The statement of cash flows uses information from all previous financial statements. Your balance sheet is a complete list of your assets, liabilities, and equity. Your total assets must equal your total liabilities and equity on the balance sheet. You can use the information from your income statement and statement of retained earnings to create your balance sheet.

Assets

Other comprehensive income includes all unrealized gains and losses that are not reported on the income statement. This financial statement shows a company’s total change in income, even gains and losses that have yet to be recorded in accordance to accounting rules. Next, in the order of financial statements, is the statement of retained earnings.

Thanks to GAAP, there are four basic financial statements everyone must prepare . Together they represent the profitability and strength of a company. The financial statement that reflects a company’s profitability is the income statement. The statement of retained earnings – also called statement of owners equity shows the change in retained earnings between the beginning and end of a period (e.g. a month or a year).

Limitations of Financial Statements

Use your net profit or loss from the income statement to prepare this next statement. After you gather information about the net profit or loss, you can see your total retained earnings and, if applicable, how much you will pay to investors. Last but not least, use all of your financial data from your other three statements to create your cash flow statement. Your cash flow statement shows you how cash has changed in your revenue, expense, asset, liability, and equity accounts during the accounting period.

• Below is a portion of ExxonMobil Corporation’s (XOM) balance sheet for fiscal year 2021, reported as of Dec. 31, 2021.
• The statement of cash flows shows the cash inflows and outflows for a company over a period of time.
• Generally Accepted Accounting Principles (GAAP) are the set of rules by which United States companies must prepare their financial statements.
• This information is useful to analyze to determine how much money is being retained by the company for future growth as opposed to being distributed externally.
• In the example below, ExxonMobil has over $2 billion of net unrecognized income.
• Now, you can’t go off creating your different financial statements all willy nilly.

Notice how the heading of the balance sheet differs from the headings on the income statement and statement of retained earnings. A balance sheet is like a photograph; it captures the financial position of a company at a particular point in time. The statement of cash flows shows the cash inflows and cash outflows from operating, financial statements are typically prepared in the following order investing, and financing activities. Operating activities generally include the cash effects of transactions and other events that enter into the determination of net income. We will examine the statement of cash flows in more detail later but for now understand it is a required financial statement and is prepared last.

Example of a Cash Flow Statement

Operating revenue is generated from the core business activities of a company. Your statement of retained earnings is the second financial statement you prepare in your accounting cycle. If your statement of retained earnings is positive, you have extra money to pay off debts or purchase additional assets. If they don’t, your balance sheet is unbalanced, and you need to find what’s causing the discrepancy between your assets, liabilities, and equity. ______ is prepared to ascertain the financial result of a business operation over a given period of time and ______ shows the financial position of a business at a particular date.