Financial Statements are often required by GAAP principles and include: the income statement, balance sheet, and cash flow statement.
The income statement measures how much the business has either earned or lost in a simple formula: Revenue – Expenses = Net Income or Loss. The typical line items on an income sheet include:
- Revenue: Amount made from generated sales
- COGS: Direct costs associated with selling the goods
- Gross profit: Revenue – COGS
- Depreciation: Loss in value of assets over time.
- Operating Income: Gross profit – operating expenses
- Interest expense: debt interest
- Net income: Revenue – Expenses
Lists assets, liability, and equity at any given time. The purpose of a balance sheet is to balance. That is, the assets should equal the combination of liability and equity. Who goes in should also be reflected in what goes out. If there is no balance, then the balance sheet has an error.
Cash Flow Statement
Describes a business’s cash inflows and outflows over a given period of time.
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