Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand. They typically include four basic financial statements accompanied by a management discussion and analysis: # A

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

reports on a company's

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

s, liabilities, and owners equity at a given point in time. # An

income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statement o ...

reports on a company's

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...

expense An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition i ...

s, and profits over a stated period. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the stated period. # A statement of changes in equity reports on the changes in equity of the company over a stated period. # A cash flow statement reports on a company's

cash flow Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money. *Cash flow, in its narrow sense, is a payment (in a currency), es ...

activities, particularly its operating,

investing Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

and

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

activities over a stated period. Notably, a balance sheet represents a snapshot in time, whereas the income statement, the statement of changes in equity, and the cash flow statement each represent activities over an

accounting period An accounting period, in bookkeeping, is the period with reference to which management accounts and financial statements are prepared. In management accounting the accounting period varies widely and is determined by management. Monthly accoun ...

. By understanding the key functional statements within the balance sheet, business owners and

financial Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

professionals can make informed decisions that drive growth and stability.

Purpose of financial statements

"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in 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.""The Framework for the Preparation and Presentation of Financial Statements"
International Accounting Standards Board. Accessed 24 June 2007. Financial statements may be used by users for different purposes: *Owners and managers require financial statements to make important business decisions that affect its continued operations.

Financial analysis Financial analysis (also known as financial statement analysis, accounting analysis, or analysis of finance) refers to an assessment of the viability, stability, and profitability of a business, sub-business, project or investment. It is per ...

is then performed on these statements 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 also need these reports in making

collective bargaining Collective bargaining is a process of negotiation between employers and a group of employees aimed at agreements to regulate working salaries, working conditions, benefits, and other aspects of workers' compensation and labour rights, rights for ...

agreements (CBA) with the management, in the case of

labor unions A trade union (British English) or labor union (American English), often simply referred to as a union, is an organization of workers whose purpose is to maintain or improve the conditions of their employment, such as attaining better wages ...

or for individuals in discussing their compensation, promotion and rankings. *Prospective

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...

s make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. *Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

(such as a long-term bank loan or debentures) to finance expansion and other significant expenditures. *Stockholders may from time to time request

insight Insight is the understanding of a specific causality, cause and effect within a particular context. The term insight can have several related meanings: *a piece of information *the act or result of understanding the inner nature of things or of se ...

into how

share capital A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash. ''Share ...

is managed, which may be made available via financial statements (or stock statements), as it lies in the financial interest of shareowners in affirming that capital stock is handled viably and mindfully with duly care.

Consolidated

Consolidated financial statements are defined as "Financial statements of a group in which the

s, liabilities, equity,

s and

s of the parent (company) and its

subsidiaries A subsidiary, subsidiary company, or daughter company is a company completely or partially owned or controlled by another company, called the parent company or holding company, which has legal and financial control over the subsidiary company. Unl ...

are presented as those of a single

economic entity An economic entity is one of the assumptions made in generally accepted accounting principles. Almost any type of organization or unit in society can be an economic entity. Examples of economic entities in accounting are hospitals, companies, m ...

", according to

International Accounting Standard International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fi ...

27 "Consolidated and separate

statements", and International Financial Reporting Standard 10 "Consolidated financial statements".

Standards and regulations

Different countries have developed their own accounting principles over time, making international comparisons of companies difficult. To ensure uniformity and comparability between financial statements prepared by different companies, a set of guidelines and rules are used. Commonly referred to as

Generally Accepted Accounting Principles Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on t ...

(GAAP), these set of guidelines provide the basis in the preparation of financial statements, although many companies voluntarily disclose information beyond the scope of such requirements.FASB, 2001
Improving Business Reporting: Insights into Enhancing Voluntary Disclosures
Retrieved on April 20, 2012. Recently there has been a push towards standardizing accounting rules made by the International Accounting Standards Board (IASB). IASB develops International Financial Reporting Standards that have been adopted by

Australia Australia, officially the Commonwealth of Australia, is a country comprising mainland Australia, the mainland of the Australia (continent), Australian continent, the island of Tasmania and list of islands of Australia, numerous smaller isl ...

, Canada and the

European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...

(for publicly quoted companies only), are under consideration in

South Africa South Africa, officially the Republic of South Africa (RSA), is the Southern Africa, southernmost country in Africa. Its Provinces of South Africa, nine provinces are bounded to the south by of coastline that stretches along the Atlantic O ...

and other countries. The

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Secur ...

has made a commitment to converge the U.S. GAAP and IFRS over time.

Management discussion and analysis

Management discussion and analysis or MD&A is an integrated part of a company's annual financial statements. The purpose of the MD&A is to provide a narrative explanation, through the eyes of management, of how an entity has performed in the past, its financial condition, and its future prospects. In so doing, the MD&A attempt to provide investors with complete, fair, and balanced information to help them decide whether to invest or continue to invest in an entity. The section contains a description of the year gone by and some of the key factors that influenced the business of the company in that year, as well as a fair and unbiased overview of the company's past, present, and future. MD&A typically describes the corporation's liquidity position, capital resources, results of its operations, underlying causes of material changes in financial statement items (such as asset impairment and restructuring charges), events of unusual or infrequent nature (such as

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...

or share buybacks), positive and negative trends, effects of

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

, domestic and international market risks, and significant uncertainties.

References

External links

IFRS Foundation & International Accounting Standards BoardFinancial Accounting Standards Board
(U.S.)

*
Fundamental Analysis: Notes To The Financial Statements
by Investopedia.com {{Authority control Financial statements