Financial statements (orfinancial 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[1][2] accompanied by a management discussion and analysis:[3]
Anincome statement reports on a company'sincome,expenses, andprofits 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.
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 anaccounting period. By understanding the key functional statements within the balance sheet, business owners andfinancial professionals can make informed decisions that drive growth and stability.
"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."[4] 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 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 thestockholders.
Employees also need these reports in makingcollective bargaining agreements (CBA) with the management, in the case oflabor unions or for individuals in discussing their compensation, promotion and rankings.
Prospectiveinvestors 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 freshworking capital or extend debtsecurities (such as a long-termbank loan ordebentures) to finance expansion and other significant expenditures.
Stockholders may from time to time requestinsight into howshare capital is managed, which may be made available via financial statements (orstock statements), as it lies in the financial interest of shareowners in affirming that capital stock is handled viably and mindfully with duly care.[5]
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 asGenerally Accepted Accounting Principles (GAAP), these set of guidelines provide the basis in the preparation of financial statements, although many companiesvoluntarily disclose information beyond the scope of such requirements.[8]
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.[9]
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'sliquidity position, capital resources,[10] 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 asmergers and acquisitions orshare buybacks), positive and negative trends, effects ofinflation, domestic and international market risks,[11] and significant uncertainties.
^Donald Kieso; Jerry Weygandt; Terry Warfield (2022). "1.1 - Financial Reporting Environment".Intermediate Accounting (18 ed.). John Wiley & Sons. p. 1-3.ISBN978-1-119-79097-6.financial statements (income statement, statement of owners' (stockholders') equity, balance sheet, and statement of cash flows) are the principal means that a company uses to assess its financial performance.
^"IAS 27 — Separate Financial Statements (2011)".www.iasplus.com. IAS Plus (This material is provided by Deloitte Touche Tohmatsu Limited (“DTTL”), or a member firm of DTTL, or one of their related entities. This material is provided “AS IS” and without warranty of any kind, express or implied. Without limiting the foregoing, neither Deloitte Touche Tohmatsu Limited (“DTTL”), nor any member firm of DTTL (a “DTTL Member Firm”), nor any of their related entities (collectively, the “Deloitte Network”) warrants that this material will be error-free or will meet any particular criteria of performance or quality, and each entity of the Deloitte Network expressly disclaims all implied warranties, including without limitation warranties of merchantability, title, fitness for a particular purpose, non-infringement, compatibility, and accuracy.). Retrieved2013-11-29.
^"IFRS 10 — Consolidated Financial Statements".www.iasplus.com. IAS Plus (This material is provided by Deloitte Touche Tohmatsu Limited (“DTTL”), or a member firm of DTTL, or one of their related entities. This material is provided “AS IS” and without warranty of any kind, express or implied. Without limiting the foregoing, neither Deloitte Touche Tohmatsu Limited (“DTTL”), nor any member firm of DTTL (a “DTTL Member Firm”), nor any of their related entities (collectively, the “Deloitte Network”) warrants that this material will be error-free or will meet any particular criteria of performance or quality, and each entity of the Deloitte Network expressly disclaims all implied warranties, including without limitation warranties of merchantability, title, fitness for a particular purpose, non-infringement, compatibility, and accuracy.). Retrieved2013-11-29.
