Financial Statement

A financial statement is a formal document that lays out key details about a business’s income, expenses, assets, and liabilities. It helps people inside and outside the business understand the company's financial position.

There are a few main types of financial statements.

• Balance sheet: The balance sheet shows what a business owns (assets), what it owes (liabilities), and what’s left for the owners (equity). It helps you understand the business’s net worth.
• Income statement: Also known as a profit and loss statement, an income statement tracks revenue and expenses over time. It tells you whether the business made a net profit or took a loss.
• Cash flow statement: This financial statement breaks down operating cash flow—where the business’s cash is coming from and where it’s going. The cash flow statement shows how well the business handles operating expenses, investments, and financing. 

Larger corporations may need other financial statements, like a statement of shareholders’ equity, which shows changes in ownership interest over time. They might also prepare audited financial statements or include footnotes, extra schedules, or detailed breakdowns for investors and regulators.

Smaller businesses don’t necessarily need audited financial statements to be compliant. But they do need to prepare financial statements using standardized accounting rules. The two most common standards are:

• Generally Accepted Accounting Principles (GAAP): GAAP is a U.S. system for recognizing revenue, reporting expenses, classifying assets and liabilities, and disclosing a company's financial position.
• International Financial Reporting Standards (IFRS): IFRS is a global accounting framework that emphasizes transparency and consistency across international borders.

Financial statements that follow these accounting rules are a key part of running and growing a business. Investors and banks want to know about your company’s financial performance before investing or providing a loan. It’s smart to have a bookkeeper or accountant prepare financial statements, update them regularly, and store them in a safe place.

Why financial statements matter

Financial statements are important for business decisions. Lenders may review them before extending credit. Investors use financial statements to assess risk and return potential.

Financial statements also support tax and compliance work. Inaccurate or missing records can complicate tax filings, audits, and regulatory reviews.

Common uses

Financial statements come into play across a range of business situations that go beyond routine accounting.

• Loan applications: Lenders may request income statements, balance sheets, cash flow statements, tax returns, or other financial records before they approve funds.
• Tax filing: Financial statements and the records behind them help organize the revenue and expense information needed to prepare a business tax return.
• Investor due diligence: Startups seeking outside investment present financial statements or projections to demonstrate their business performance and growth potential.
• Selling a business: Buyers often review several years of financial statements to evaluate the business’ value, revenue trends, expenses, debts, and liabilities.

Key characteristics

To ensure accuracy and reliability for stakeholders, financial statements generally adhere to these core principles:

• Standardized format: Businesses prepare statements in accordance with recognized accounting standards, making them comparable across entities and periods.
• Period-specific: Each statement covers a defined reporting period or date.
• Auditable: A CPA may compile, review, or audit financial statements when lenders, investors, or other stakeholders need more confidence in the numbers.

Financial statement vs. state annual report

These terms are not always the same. For many LLCs and corporations, a state annual report is a compliance filing that updates basic business information, such as the company’s address, registered agent, or ownership details. It usually is not a full financial statement. Financial statements are accounting records that show a business’s financial activity and position.

Related terms

Financial statements connect to several broader legal and operational concepts that affect how a business records, reports, and distributes its financial activity.

• Distribution in business. Owner distributions appear on both the cash flow statement and the balance sheet.
• Delinquent status. A status that can result from failure to maintain proper financial records and meet filing obligations.
• Dissolution. It is the formal process of closing a business entity and ending its legal existence under state law.

FAQs about financial statement

What is the difference between the three core financial statements?

The income statement shows whether a business earned a profit or had a loss during a specific period. The balance sheet shows what the business owns and owes, and what it has in equity on a specific date. The cash flow statement shows how cash moved in and out of the business during a period. A business can show a profit and still have cash flow problems, so owners should review the statements together.

How do financial statements differ from a tax return?

A tax return follows tax law, while financial statements follow accounting standards. As a result, the same transaction may appear differently. For example, depreciation is often calculated differently for tax and accounting purposes.

When does a small business need audited financial statements?

Most small businesses do not need audited financial statements unless a lender, investor, buyer, government program, contract, or regulator requires them. Some businesses use reviewed or compiled financial statements instead, depending on what the outside party requests.