Financial statements are written report that shows the financial activities and performance of a business organization, or any entity. It is formatted to present the information in a clear and structured way, making it easier to understand by users. In most cases, they are audited to ensure accuracy for tax, financing, or investing purposes.
Financial statements are important for a variety of reasons. Investors use them to assess a company’s financial health and make informed investment decisions. Lenders use them to evaluate the company’s creditworthiness when deciding whether to grant loans. Managers rely on them to track the company’s performance, identify areas for improvement, and make strategic decisions.
There are four primary financial statements used for businesses:
- Balance Sheet: This statement provides a snapshot of a company’s financial position at a specific point in time. It shows what the company owns (assets), what it owes (liabilities), and the amount invested by the owners (shareholders’ equity). Essentially, it’s a breakdown of the company’s net worth at that particular date.
- Income Statement: Also known as the profit and loss (P&L) statement, this report focuses on a company’s profitability over a specific period. It details the company’s income (revenue) from its operations, the expenses it incurred, and ultimately the net profit or loss.
- Cash Flow Statement: This statement tracks the movement of cash within the company, categorized into operating, investing, and financing activities. It shows how well the company generates cash to pay its bills, invest in growth, and distribute money to shareholders.
- Statement of Changes in Equity: This statement explains a company’s shareholders’ equity changes over a specific period. It details how much profit was retained by the company (reinvested), how much was paid out as dividends to shareholders, and any other changes that may have affected equity.
These financial statements are crucial for stakeholders, including investors, creditors, regulators, and management, as they provide valuable information about the financial performance, position, and cash flow of a business.