Financial Statements
A financial statement, or financial report, is a formal record of the financial activities of a business, person, or other entity. For a business enterprise, relevant financial information presented in a structured manner is called a financial statement. Statements typically include four basic financial statements accompanied by a management discussion and analysis. These statements are as follows:
Balance Sheet
This statement reports on a company's assets, liabilities, and ownership equity at a given point in time.
Income Statement
This statement, also referred to as profit and loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These statements include sale and various expenses incurred during the processing state.
A Sample Income Statement
Expenses are listed on a company's income statement.
Statement of Cash Flows
This statement reports on a company's cash flow activities—particularly its operating, investing, and financing activities. For large corporations, these statements are often complex and may include extensive notes, an explanation of financial policies, and management analysis. The notes typically provide detail for items on the balance sheet, income statement, and cash flow statement. Notes to financial statements are considered an integral part of the financial statements.
Statement of Shareholder's Equity
This statement explains changes in the company's equity throughout the reporting period.
Purpose of Financial Statements
The objective of financial statements is to provide information about financial position, performance, and changes. Statements are useful to a wide range of users making economic decisions. Financial statements should be understandable, relevant, reliable, and comparable. Reported assets, liabilities, equity, income, and expenses are directly related to an organization's financial position.
Financial statements are intended to be understandable by readers who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.
Owners and managers require financial statements to make business decisions that affect continued operations. Statements are analyzed to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders.
Employees need financial statements when making collective bargaining agreements (CBA) with the management and when discussing their compensation, promotion, and rankings.
Prospective investors hire analysts to prepare financial statements. This allows investors to assess the viability of a business.
Financial institutions (banks and other lending companies) use statements to decide whether to grant a company fresh working capital or extend debt securities (such as a long-term bank loan or debentures).
Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.
Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.