By Chron Contributor Updated July 19, 2021
Understanding the information contained in your balance sheet, income statement, statement of retained earnings and statement of cash flows is crucial for your business to survive. These four financial statements and how to construct them can help you share information to create an interlocking picture of your business’s financial health. This picture changes daily as each transaction affects one or more of your financial statements. You can update and analyze your financial statements to identify changes in your cash flow and net income.
Statement of Cash Flows
The statement of cash flows takes some of its information from the balance sheet and the income statement. Balance sheet cash transactions are transferred to the statement of cash flows. For example, buying new equipment with cash increases your long-term balance sheet items and appears as a cash outflow on the statement of cash flows. Income statement expenses paid in cash are listed on the statement of cash flows as a cash outflow. When completed, the statement of cash flows reveals how much cash your business took in and how it was used.
Income Statement
The income statement shows your sales revenue, operating expenses and net income for a specific time period, according to Corporate Finance Institute. Sales revenue is broken down into cash and credit sales. The amount of your cash sales is included with the cash account on the balance sheet and are listed on the statement of cash flows. The income statement expenses paid with cash and cash payments made to vendors are included on the statement of cash flows. The net income shown on the income statement is the difference between the balance sheet debits and credits.
Statement of Retained Earnings
The statement of retained earnings uses the net income reported on the income statement to show how much profit your business kept, according to Accounting Tools. The ending retained earnings balance from the previous accounting period is used as the beginning balance for the current retained earnings statement. The net income taken from the income statement is added to the retained earnings beginning balance. After you subtract any dividends you paid, the ending balance shows whether your business profit increased or decreased compared to previous accounting periods.
Balance Sheet
The balance sheet is a snapshot of the balance in each account resulting for your cash and accrual transactions. These transactions are reported on your other basic financial reports. The cash sales reported on the income statement are added to the balance sheet cash account. The credit sales are added to your accounts receivables. The balance of the retained earnings is included in the owner’s equity section found on the balance sheet. The balance sheet accounts fluctuate depending on type of business transaction. Present the four financial statements in order when meeting with potential investors.
