Financial statements are also known as financial reports. They are formal records of the financial activities of a business concern. These statements give a summary of a business’ profitability and financial conditions in both the short as well as long term.
There are four basic financial statements- the balance sheet,the income statement,the cash flow statement, and the statement of retailed earnings. Balance sheet is referred to as statement of financial condition. It provides reports on a company’s assets, liabilities and net equity at a certain point of time.Income statement is referred to as Profit or loss statement.
It reports on a company’s results of operations over a period of time. Cash flow statement reports on a company’s cash flow activities, specially its operations, investments and financing activities.
Statement of retained earnings attempts to explain the changes in a company’s retained earnings over the specific period of reporting. With regards to big companies, these statements are often not simple and could include an extensive set of notes to the financial statements and discussion and analysis by the management.
The notes usually describe each item on the balance sheet, income statement and cash flow statement in detail.
Notes to financial statements are thought of as being integral part of the financial statements. The financial statements provide information on the financial position, performance and changes in the same, of a company, which is useful to a wide range of consumers in making economic decisions.
Financial statements are supposed to be comprehendible, not useless, trustworthy and comparable. Reported assets, liabilities and equity are directly related to a company’s monetary status. Reported income and expenses are relevant regarding the financial performance of a company.Financial statements should be understood by readers who have a decent know how of business and economic activities and accounting and who are ready to study the information with application.
Financial statements are employed by a wide group of parties, both inside and outside a business. Usually, these users are the internal users and the external users.The internal Users are the owners, managers, employees and other parties who are directly related to a concern.
Owners and managers need financial statements to make crucial business decisions that affect its performances. Financial analyses are then performed on these statements to furnish the management with a better detailed understanding of the figures. These statements are also employed as part of management’s report to its stockholders.
Employees also need these reports in order to make collective bargaining agreements with the management,and, for labor unions or for individuals it is useful in discussing their compensation, promotion and rankings.
External Users are future investors, banks, government agencies and other parties who are not in the business but require financial information about the business for a different number of reasons.
Potential investors use financial statements to determine the viability of investing in a business. Financial analyses are often employed by investors and is prepared by professional financial analysts,which is the basis of investment decisions.
Financial institutions,like the banks and other lending companies have used these to determine whether to grant a concern with new working capital or provide debt securities, like a long-term bank loan or debentures, to fund expansion and other important expenditures.
Government entities, like the tax authorities, use financial statements to ascertain the propriety and correctness of taxes and other duties declared and paid by an organization. Media and the general public are also keen on financial statements for different causes
Last Updated on : 1st August 2013