Financial statements are written records of a business financial situation. They include standard reports like the balance sheet, income or profit and loss statements, and cash flow statements; and serve as a tool for financial reporting about an entity to outside parties. Financial statements are a summation of the financial position of a business at a given point in time. Generally, a financial statement is designed to meet the needs of many diverse users, especially the present and potential owners and creditors.
Financial statements result from simplifying, condensing, and aggregating loads of data obtained from a company’s (or an individual’s) accounting system.
Financial reporting includes not only financial statements, but the real objectives of financial reporting are communicating financial information about an enterprise to its external users, about investment and credit decisions and in assessing cash flow prospects, an enterprise’s resources, claims to those resources, and changes in the resources, supplementary information such as changing prices and other means of financial reporting and analysis such as management discussions, analysis and letters to the stockholders.
The elements of financial statements contain
- Balance sheet (or statement of financial position)
- Income statement
- Cash flow statement
- Statement of changes in owner’s equity or stockholder’s equity
The balance sheet provides a snapshot of a business on any particular date. It lists the entity’s assets, liabilities, and in the case of a corporation, the stockholder’s equity on a specific date.
The income statement presents a summary of the revenues, gains, expenses, losses, and net income or net loss of a business for a specific period. This statement is similar to a moving picture of the business’s operations during this period of time. The cash flow statement summarizes a business’s cash receipts and cash payments relating to its operational, investment, and financial activities during a particular period. A statement of changes in owners’ equity or stockholder’s equity reconciles the beginning of the period equity of an enterprise with its ending balance.
Items currently reported in financial statements are measured by different attributes such as historical cost, current cost, current market value, net reliable value and present value of future cash flows. Historical cost is the traditional means of presenting assets and liabilities.
Notes to financial statements are informative disclosures appended to the end of financial statements. They provide important information concerning such matters as depreciation and inventory methods used, details of long-term debt, pensions, leases, income tax, contingent liabilities, methods of consolidation, and other matters. Notes are considered an integral part of the financial statements. Schedules and parenthetical disclosures are also used to present information not provided elsewhere in the financial statements.
Each financial statement has a heading, which provides the name of the entity, the name of the statement, and the date or time covered by the statement. The information provided in financial statements is naturally financial and expressed in units of money. The information relates to an individual business enterprise. The information often is the product of approximations and estimates, rather than exact measurements.
Financial statements typically reflect the financial effects of transactions and events that have already taken place (ie. historical).
Financial statements presenting data for two or more periods are called comparative statements. Comparative financial statements usually give similar reports for the current period and for one or more preceding periods. They provide analysts with significant information about trends and relationships over two or more years.
Comparative statements are more significant than single year statements.
Comparative statements emphasize the fact that financial statements for a single accounting period are only one part of the continuous history of the company.
Interim financial statements are reports for periods of less than a year. The purpose of interim financial statements is to improve the timeliness of accounting information.
Some companies issue comprehensive financial statements while others issue summary statements. Each interim period should be viewed primarily as an integral part of an annual period and should generally continue to use the generally accepted accounting principles (GAAP) that were used in the preparation of the company’s latest annual report. Financial statements are often audited by independent accountants for the purpose of increasing user confidence in their reliability.
Every financial statement is prepared on the basis of several accounting assumptions
- That all transactions can be expressed or measured in dollars
- That the enterprise will continue in business indefinitely and
- That statements will be prepared at regular intervals
These assumptions provide the foundation for the structure of financial accounting theory and practice, and explain why financial information is presented in a given manner.
Financial statements must also be prepared in accordance with generally accepted accounting principles and must include an explanation of the company’s accounting procedures and policies. Standard accounting principles call for the recording of assets and liabilities at cost; the recognition of revenue when it is realized and when a transaction has taken place (generally at the point of sale), and the recognition of expenses according to the matching principle (costs to revenues). Standard accounting principles further require that uncertainties and risks related to a company be reflected in its accounting reports and that, generally, anything that would be of interest to an informed investor should be fully disclosed in the financial statements.
Financial reporting and analysis is essential to assess the performance of business. It talks about the profit, loss, income statement, cash flow statement and changes in equity and stakeholders equity. So these reports need to be perfect and updated regularly. These reports help a business understand their progress and can help themselves fight a difficult situation. So take your financial reporting very seriously.