Introduction

Financial reports, also called financial statements, are documents that summarize the financial performance and position of a business. The most important statements are the Balance Sheet, Profit and Loss Statement, Retained Earnings Statement, and Cash Flow Statement. The Balance Sheet shows what a business owns (assets), what it owes (liabilities), and the owner’s share (equity) at a specific date, like a snapshot of financial health. The Profit and Loss Statement (also called Income Statement) explains how much the business earned and spent during a period, showing the net profit or loss. The Retained Earnings Statement tells how much of the profit is kept in the business after paying dividends to owners or shareholders, showing growth over time. The Cash Flow Statement tracks the actual movement of cash in and out of the business under operating, investing, and financing activities, helping to understand liquidity and how money is managed. Together, these reports give a complete picture: the balance sheet shows position, profit and loss shows performance, retained earnings shows accumulated profit, and cash flow shows money movement.

The three main elements of a balance sheet:

Assets

These are resources owned or controlled by the business that provide future economic benefits. Assets are usually divided into Current Assets: expected to be used or converted into cash within one year (e.g., cash, accounts receivable, inventory) and Non-Current Assets: long-term investments not expected to be liquidated within a year (e.g., property, equipment, patents).

Liabilities

These are obligations the company owes to outsiders—debts or future sacrifices of economic benefits. Liabilities are classified into:Current Liabilities due within one year (e.g., accounts payable, short-term loans).and Non-Current Liabilities payable after one year (e.g., long-term loans, bonds payable).

Equity (Owner’s Equity or Shareholders’ Equity)

This represents the owners’ residual interest in the assets after deducting liabilities. It includes Capital / Share Capital, Retained Earnings and Reserves

The balance sheet provides a snapshot of what a company owns, owes, and the value left for owners at a particular date.

Income Statement

The Income Statement, also known as the Profit & Loss Statement (P&L), is a financial report that summarizes a company’s revenues and expenses over a specific period (monthly, quarterly, or annually) to determine its net profit or loss.

The income statement helps stakeholders assess the company’s profitability and operational performance over time.

This statement is essential for understanding a company’s cash-generating ability and whether it can meet obligations, reinvest, and pay dividends.

Retained Earnings

Retained Earnings refer to the portion of a company’s net profit that is not distributed as dividends to shareholders but is kept (retained) within the business to reinvest in operations, pay off debt, or fund future growth.

Retained earnings are crucial for long-term business sustainability and financial planning.

 

Final Output:

• The net increase or decrease in cash during the period.
  

The ending cash balance, which ties back to the cash shown on the balance sheet.

How Are Financial Statements Interconnected?

Financial statements are fundamentally interconnected, meaning that each one provides information that influences the others. The Income Statement reports a company’s financial performance over a period, primarily through revenues and expenses, resulting in net income or loss.

 This net income does not stand alone—it flows directly into the Balance Sheet by affecting the Retained Earnings under the shareholders’ equity section. At the same time, the ending cash balance from the Cash Flow Statement reconciles with the cash reported on the Balance Sheet, completing the loop. This intricate linkage ensures consistency and accuracy across financial reports and allows stakeholders to analyze a company’s financial health holistically.