3.2 Introduction to Financial Statements
Financial Statements are formal records of the financial activities and position of a business, organisation, or individual. They provide an overview of a company’s financial performance and position over a specific period (typically quarterly or annually). The primary financial statements you typically learn in the first year of your undergraduate degree are the Balance Sheet, Income Statement and Cashflow Statement.
Balance Sheet
This financial statement is also known as the Statement of Financial Position, it shows a company’s assets, liabilities, and shareholders' equity at a specific point in time. It provides a snapshot of what the company owns (assets) and owes (liabilities).
| Category | Item | Current Year (£) | Prior Year (£) |
|---|---|---|---|
| Assets | Cash and Cash Equivalents | 10,000 | 10,000 |
| Accounts Receivable | 25,000 | 21,000 | |
| Inventory | 20,000 | 20,000 | |
| Total Current Assets | 55,000 | 51,000 | |
| Liabilities | Accounts Payable | 20,000 | 15,000 |
| Taxes Payable | 6,000 | 6,000 | |
| Long-Term Bonds Issued | 14,000 | 12,000 | |
| Total Liabilities | 40,000 | 33,000 | |
| Shareholder’s Equity | Common Stock | 6,000 | 5,000 |
| Retained Earnings | 9,000 | 13,000 | |
| Total Shareholder’s Equity | 15,000 | 18,000 | |
| Total Liabilities and Equity | 55,000 | 51,000 |
The main components in this statement are the main components of the Accounting equation we learnt earlier, and like the name suggests, the assets, liabilities and equity should be balanced. When writing a balance sheet it's always good to add the equity and liabilities section and see if it's equal to the assets.