Financial statements represent the formal record of an entity’s financial activities. These are written reports that quantify a company’s financial strength, performance, and liquidity. Financial statements reflect the financial impact of business transactions and events on an entity.
Financial statements are written records that convey a company’s business activities and financial performance. Financial statements are typically audited by government agencies, accountants, corporations, etc. for accuracy and for tax, financing, or investment purposes.
Investors and financial analysts rely on financial data to analyze a company’s performance and make predictions about future trends in its company’s stock price. One of the most important resources for reliable and audited financial data is the annual report, which contains a company’s financial statements.
Investors, market analysts, and creditors use financial statements to evaluate a company’s financial health and profit potential. The three major financial statements are the balance sheet, income statement, and cash flow statement.
Financial statements include:
- balance sheet
- Profit and loss statement
- Cash Flow Statement.
IMPORTANT NOTE:
- Financial statements are written records that convey a company’s business activities and financial performance.
- The balance sheet provides an overview of assets, liabilities, and stockholders’ equity as a snapshot in time.
- The income statement focuses on a company’s revenue and expenses during a specific period. Once expenses are subtracted from revenue, the report produces a profit figure for the company, called net income.
- The cash flow statement (CFS) measures a company’s ability to generate cash to pay down debt, fund its operating expenses, and fund investments.
Four types of financial statements
The four main types of financial statements are:
1. Statement of financial position or balance sheet
The statement of financial position, also known as the balance sheet, shows the financial position of an entity on a given date. It consists of the following three elements:
- Assets: Things owned or controlled by a business (such as cash, inventory, plant and machinery, etc.)
- Liability: Something a business owes someone (e.g. creditor, bank loan, etc.)
- Equity: The liability of a business to its owners. This represents the amount of capital remaining after a business has used its assets to pay off outstanding liabilities. Therefore, equity represents the difference between assets and liabilities.
2. Income statement
Profit and loss statement, also known as Profit and loss statementreports a company’s financial performance during a specific period in terms of net profit or loss. The income statement consists of the following two elements:
- Revenue: The amount of money a business earns over a period of time (e.g. sales, dividend income, etc.)
- Expenses: Costs incurred by a business over a period of time (such as salaries and wages, depreciation, rent, etc.)
Net profit or loss is calculated by subtracting expenses from revenue.
Also Read: Definition, Types and Importance of Finance
3. Cash flow statement
The cash flow statement shows changes in cash and bank balances over a period of time. Cash flow changes are divided into the following components:
- Operating activities: cash flows representing the main activities of the enterprise.
- Investing activities: Represents cash flows from the purchase and sale of assets other than inventory (such as the purchase of factory buildings)
- Financing Activities: Represents cash flows generated or spent to raise and repay equity and debt and to pay interest and dividends.
4. Statement of changes in shareholders’ equity
statement of changes in equity, also known as statement of retained earningsdetailing the changes in owners’ equity over a period of time. Changes in owners’ equity come from the following components:
- Net profit or loss for the period reported on the income statement
- Equity issued or repaid during the reporting period
- dividend payment
- Gain or loss recognized directly in equity (e.g. revaluation surplus)
- Effects of changes in accounting policies or correction of accounting errors
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