What Are Financial Statements?
Financial statements are formal written records prepared periodically based on daily accounting data, following standardized formats, content requirements, and methods. They provide an organized summary of a business’s financial position at a specific date, as well as its performance and cash flows over a defined reporting period.
The Purpose of Financial Statements
- Internal Management:
Financial statements systematically reflect a company’s financial condition, operating performance, and cash flow status over a given period. They enable managers to monitor progress toward objectives, evaluate past and current performance, identify financial issues, and refine operational or strategic plans. They also serve as a foundation for economic forecasting and decision-making. - External Stakeholders:
Investors, creditors, and other interested parties rely on financial statements to understand a company’s profitability, solvency, return on investment, and future growth potential. These insights help them make well-informed decisions related to investing, lending, or forming business relationships. - Regulatory Compliance:
Financial statements also help regulatory bodies—including tax authorities, finance departments, and auditors—supervise a business’s compliance with laws and regulations. They are key tools in ensuring accurate tax reporting and identifying financial irregularities such as fraud or misstatements.
Components of Financial Statements
- Balance Sheet
Reflects the company’s assets, liabilities, and equity at the end of a reporting period. It provides insight into the company’s financial stability, liquidity, and capital structure. - Income Statement (Profit and Loss Statement)
Summarizes revenues, expenses, gains, and losses for the current period, indicating the company’s net profit or loss. - Cash Flow Statement
Details the inflows and outflows of cash, categorized into three activities: operating, investing, and financing. This statement clarifies the company’s ability to generate cash and manage liquidity across its business activities. - Statement of Changes in Equity
Shows the changes in shareholders’ equity during the reporting period, including direct gains or losses recorded under equity, as well as capital injections, dividends, and retained earnings. - Notes to Financial Statements
These provide essential supplementary information, which typically includes:- Basic company information
- Basis of financial statement preparation
- Statement of compliance with accounting standards
- Significant accounting policies and estimates
- Disclosures of changes in policies, estimates, and error corrections
- Explanations of key financial items
- Other important matters (e.g., contingencies, post-balance-sheet events, related-party transactions)