Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.
Financial statements include:
- Balance sheet
- Income statement
- Cash flow statement
Financial statements are written records that convey the business activities and the financial performance of a company.
The balance sheet provides an overview of assets, liabilities, and stockholders' equity as a snapshot in time.
The income statement primarily focuses on a company’s revenues and expenses during a particular period. Once expenses are subtracted from revenues, the statement produces a company's profit figure called net income.
The cash flow statement measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments.
Financial Statements are prepared for an accounting period, generally for a year. This accounting period is referred to as a ‘fiscal year’ and differs from a calendar year since the accounting period may differ based on company needs or industry practices. For example, the fiscal year ends in January for many retail sector companies due to the high sales volumes experienced at the end of the calendar year.
What is the difference between Financial Reporting and Financial Statements?
Financial Reporting vs. Financial Statements
Financial reporting includes providing information to stakeholders to make decisions. Financial statements are the outcome of the process of financial reporting.
Financial Reporting is governed by the International Accounting Standards Board (IASB). Financial Statement is governed by the International Financial Reporting Standards (IFRS).
The terms “financial report” and “financial statement” are often used interchangeably, but they are not one in the same. “Financial report” is an umbrella term that several types of reports fall beneath. Financial statements are one such report that falls under the financial report umbrella. In other words, all financial statements are financial reports, but not all financial reports are financial statements.
Financial reports gather important financial information for distribution to the public. Under this umbrella are:
- Financial statements such as income statement, balance sheet, statement of cash flows.
- Quarterly and annual reports
- Quarterly earnings that are then distributed via press releases, conference calls, or company website.
- Quarterly and annual reports for governmental agencies such as the Securities and Exchange Commission.
It is incredibly important that your financial reports are accurate and produced in a timely fashion. This helps your company make informed business decisions and it helps you to maintain your compliance and your reputation in the industry. A good financial reporting solution should be fast, easy to use, and always accurate.
When you’ve implemented the right reporting solution, you’ll see an improvement in productivity. Generating, packaging, and distributing reports can be done with precision and speed, even when consolidating data from different sources, locations, and currencies.
The purpose of financials statements is to provide information about financial position, cash flows, and the results of operations. This information helps the audience of these statements make decisions about allocation of resources.
As a whole, financial statements can be used for credit decisions, investment decisions, taxation decisions, and union bargaining decisions.
Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about its future direction of the company's stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm's financial statements.
The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.
Although financial statements provide a wealth of information on a company, they do have limitations. The statements are open to interpretation, and as a result, investors often draw vastly different conclusions about a company's financial performance.