What Are Financial Statements?

4/24/2012
BUS 100
Jay Hosey

What Are Financial Statements?
Business owners use three basic financial statements to track the financial health of there businesses. These statements are the income statement, the cash flow statement, and the balance sheet. Business owners generally create these statements monthly using their financial records.

The Income Statement
An income statement is a financial statement used to show whether a business is generating a profit or experiencing a loss. This is done by identifying all the money coming into the business, which is usually the revenue generated by day-to-day sales. Then all the money going out of the business is identified; these are all the bills that must be paid to maintain the business. To determine net profit or loss, the business owner subtracts the expenses from the revenues. If this number is positive—meaning, the revenues are greater than the expenses—the business is generating a profit. If the number is negative—meaning the expenses are greater than the revenues—the business is experiencing a loss.
There are several parts of an income statement. These include revenue, cost of goods/services sold, gross profit, fixed operating costs, pre-tax profit, taxes, and net profit(loss). In Figure 1 below, you can see an example of a simple income statement for a company that sells name badge holders. This income statement allows you to see the business is profitable, and how profitable.
The Cash Flow Statement
The cash flow statement shows cash receipts less cash disbursements over a period of time, generally a month. The first section of a cash flow statement shows all sources of income for the month. The second section shows all cash disbursed by the business for that month. The last section shows the net change in cash flow. This shows the owner whether the business had a