Financial statement (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Therefore, relevant financial information is presented in a structural manner and in a form which is easy to understand.
For large corporations, these statements may be complex and may include an extensive set of footnotes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements; considered as an integral part of the financial statements.
They typically include four basic financial statements accompanied by a management discussion and analysis:
1. An Income Statement.
An income statement, or profit and loss, is a summary of your business’s profits and losses during a period. You can prepare the statement monthly, quarterly, or annually. Once you decide on your time frame, break down your business’s revenue and expenses on the statement.
An income statement shows how well your company is doing over time. It measures the profitability of your business.
Look for the bottom line on an income statement to see whether you have a net profit or net loss. This represents whether your business’s net earnings were positive or negative during the period.
Keep in mind that the income statement doesn’t show overall financial health, money you owe or owed to you, or assets and liabilities.
2. A Balance Sheet or Statement of Financial Position.
The balance sheet summarizes your financial health on a specific date. It shows you what you own and owe by breaking down your assets, liabilities, and equity. You can create a balance sheet at the end of a period, such as monthly or quarterly.
3. A Cash Flow Statement
Onto the last of the three most common financial statements: the cash flow statement. So, what is a cash flow statement? In short, the cash flow statement measures money flowing into and out of your business during a period. You can use the cash flow statement to see how much cash you have on hand. Update the cash flow statement daily, weekly, or monthly.
The cash flow statement begins with your starting cash balance. Then, you must include cash inflows and outflows.
4. A Statement of Changes in Equity or Statement of Equity.
A statement of changes in equity and similarly the statement of changes in owner’s equity for a sole trader, statement of changes in partners’ equity for a partnership, statement of changes in shareholders’ equity for a company or statement of changes in taxpayers’ equity[1] for government financial statements is one of the four basic financial statements.
The statement explains the changes in a company’s share capital, accumulated reserves and retained earnings over the reporting period. It breaks down changes in the owners’ interest in the organization, and in the application of retained profit or surplus from one accounting period to the next. Line items typically include profits or losses from operations, dividends paid, issue or redemption of shares, revaluation reserve and any other items charged or credited to accumulated other comprehensive income. It also includes the non-controlling interest attributable to other individuals and organizations.
Purpose for Financial Statements
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. Moreover, 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 it should 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”.
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Source(s) 1: https://en.wikipedia.org/wiki/Statement_of_changes_in_equity
Source(s) 2: https://www.patriotsoftware.com/
