As a kid, you might have seen your parents or other adults talking about money and numbers. Sometimes they might have mentioned things like “profit and loss” or “balance sheets,” and you might have wondered what they were talking about. Well, those are all part of something called a financial statement.
What is a financial statement?
Simply put, a financial statement is a report that shows the financial health of a business. It’s like a report card that tells you how well the business is doing financially. A financial statement typically includes information on a business’s income, expenses, profits, and losses over a period of time, usually a year or a quarter.
Why do financial statements matter?
Financial statements are important for a few reasons. First, they can help business owners understand how their business is doing financially. They can use this information to make better decisions about things like investments, expenses, and hiring.
Financial statements are also important for investors and lenders. When someone is considering investing in or lending money to a business, they want to know how financially healthy the business is. Financial statements can help them make informed decisions about whether to invest or lend money.
What are the different types of financial statements?
There are three main types of financial statements: the income statement, the balance sheet, and the cash flow statement.
The income statement shows a business’s income and expenses over a period of time, usually a year or a quarter. It’s like a report card that shows how much money the business made and how much it spent.
The balance sheet shows a business’s assets (things it owns), liabilities (things it owes), and equity (the value of the business). It’s like a snapshot of the business’s financial position at a specific point in time.
The cash flow statement shows how much money a business has coming in and going out over a period of time. It’s like a report card that shows how much money the business has in the bank and how much it’s spending.
Financial statements are essential tools used to measure the financial health of a business. They help business owners make better decisions and provide important information to investors and lenders. Understanding the different types of financial statements can help you better understand how businesses work and how they make money.
Want to Learn About Finacial Statements for Free?
Khan Academy has hundreds of lessons for free. No ads, no subscriptions.