A financial statement is a tool for viewing the financial condition of an individual, or a business, at a particular moment in time. Financial statements are necessary when preparing income tax returns and when applying for a bank loan. They are also the result of the accounting process and, as such, are an important component of business and individual financial records.
Net Worth/Balance Sheet
One of the most common types of financial statements is the net worth statement for an individual, or a balance sheet if the subject is a business. In both cases, the assets are listed and totaled, liabilities are listed and totaled, and the liabilities are subtracted from assets, providing the bottom line, or what an individual or business is worth. This number can be negative.
In the broadest sense, an asset is anything of value and its worth is what you paid for it. A liability is anything of negative value, such as debt, and its (negative) worth is what you expect to pay to get rid of it.
Cash Flow/Income Statement
A cash flow, or income, statement shows the funds that came in and went out over a fixed time period, such as a month or a year. For an individual, this is simply a ledger of personal income and personal expenses, with expenses being subtracted from income to obtain the net income.
For a business, the process is similar, but non-cash expenses, such as depreciation (wear and tear on business assets) and amortization (a large expense spread out over time), should also be subtracted from income to get net income.
The net income can be negative in either case.
Video of the Day
The combination of a current balance sheet/net worth statement and a net income/cash flow statement shows the financial health of a business or individual at a given point in time. In evaluating financial performance, both intrinsic value (balance sheet/net worth) and earning power (net income/cash flow) are important considerations.
The term "snapshot" refers to the fact that a financial statement reflects only the financial conditions as of the given date. The information can change rapidly, so only a current financial statement should be used in making an evaluation.
When You May Need Financial Statements
Loan officers require financial statements when you're applying for a loan, and so do many prospective clients of small businesses. For example, someone hiring a contracting or construction company might wish to see that the business has the financial resources to complete a lengthy, costly project.
You also might need to provide a financial statement to prospective employers, particularly if you're applying for high-responsibility financial positions, positions requiring security clearances or positions where you would have access to proprietary information. A sound financial statement shows an individual's sense of responsibility and is proof of earning power. Substantial assets also may reassure a potential employer that the employee is likely to be honest, because he has less incentive to steal.
The IRS and state and municipal taxing agencies require much of the same information that appears in current financial statements, so keeping them up-to-date is a great help in filling out tax returns. You also will be better able to handle an IRS audit.
Cost of Generating a Financial Statement
Any qualified accountant can generate a financial statement for either a business or an individual; it is usually a quite simple process. How much time the accountant spends to produce the statement(s), and therefore how much it will cost you, depends on the following: the accuracy and completeness of your personal and/or business records; the existence of prior financial statements; and the complexity of your federal and state taxation situation.
Most accountants charge between $50 and 75 per hour, and you can expect a bill of $200 to $300 for a simple set of financial statements the first time they are done. They should cost substantially less on subsequent occasions.