Types of Financial Statements

Why This Matters

Financial statements aren't just bureaucratic paperwork—they're the diagnostic tools that reveal whether a financial services firm is thriving, struggling, or hiding something problematic. You're being tested on your ability to understand what each statement reveals, how they connect to each other, and why regulators, investors, and analysts rely on specific statements for specific questions. The interplay between liquidity assessment, profitability measurement, cash management, and equity tracking forms the foundation of financial analysis in this industry.

Don't just memorize which statement shows what. Know why each statement exists, what questions it answers, and how financial services firms use them differently than other industries. When an exam question asks about assessing a bank's ability to meet short-term obligations, you need to immediately connect that to the right statement—and explain why.

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Statements That Capture a Moment in Time

Some financial statements provide a snapshot—a freeze-frame of where a company stands on a specific date. These point-in-time statements reveal structure and position rather than activity.

Balance Sheet (Statement of Financial Position)

• Shows assets, liabilities, and equity at a specific date—think of it as a financial photograph, not a movie
• Must satisfy the accounting equation: $\text{Assets} = \text{Liabilities} + \text{Equity}$, which serves as a built-in error check
• Categorizes items by liquidity—current (due within one year) vs. non-current, critical for assessing a firm's ability to meet obligations

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Statements That Track Activity Over Time

Other statements measure what happened during a period—a quarter, a year, or another defined timeframe. These flow statements capture performance, movement, and change.

Income Statement (Profit and Loss Statement)

• Summarizes revenues minus expenses over a period—answers the fundamental question "Did we make money?"
• Reports multiple profit levels: gross profit, operating income, and net income reveal where profitability breaks down
• Measures operational efficiency—comparing revenue growth against expense growth shows whether the business model is scaling effectively

Cash Flow Statement

• Tracks actual cash movement across three categories: operating, investing, and financing activities
• Operating activities reveal core business health—a profitable company with negative operating cash flow is a red flag
• Distinguishes cash from accrual accounting—essential because a firm can show profits on the income statement while running out of cash

Statement of Changes in Equity

• Tracks equity account movements over a period—including retained earnings, share capital, and other comprehensive income
• Shows the profit-to-equity pipeline—how much net income was retained vs. distributed as dividends
• Reveals ownership changes—stock issuances, buybacks, and other capital transactions that affect shareholder value

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Supporting Documentation

Financial statements don't stand alone—they require context and explanation to be properly understood. Notes transform raw numbers into meaningful information.

Notes to the Financial Statements

• Provide essential context for figures in the main statements—accounting policies, assumptions, and estimation methods
• Disclose hidden risks—contingent liabilities, off-balance-sheet arrangements, and commitments that don't appear in primary statements
• Required for regulatory compliance—accounting standards mandate specific disclosures, making notes legally necessary, not optional

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Quick Reference Table

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Self-Check Questions

1. Which two statements would you analyze together to determine why a profitable financial services firm is experiencing cash shortages?

2. If an exam question asks about a company's ability to meet obligations due within 90 days, which statement provides the most direct answer, and which specific section would you examine?

3. Compare and contrast what the balance sheet and statement of changes in equity reveal about shareholder equity—what can you learn from one that you can't learn from the other?

4. A bank reports strong net income but weak operating cash flow. Which sections of which statements would you examine to explain this discrepancy?

5. Why are the notes to financial statements particularly important for financial services firms compared to companies in other industries? Identify at least two types of disclosures that would be especially relevant.