Financial statements

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    Financial instrument

    A financial statement is a formal report detailing the financial activities and performance of a business, individual or other entity.

    What’s the purpose of a financial statement?

    Its purpose is to present financial information in the most straightforward way possible, for both the company itself and any interested parties (such as shareholders) who will be reading the report.

    Financial statements are one of the primary methods that companies employ to communicate with shareholders and potential investors. They can also be used by banks or other financial institutions when making decisions about whether to grant the company any further capital.

    Reports have traditionally been distributed on paper, but many companies are now also producing digital copies.

    Common types of financial statement

    The most common/basic financial statements for businesses include the balance sheet, profit and loss statement, cash flow and statement of retained earnings. These will often be accompanied by a summary of activities by the company’s CEO and other management analysis.

    • Balance sheet (or “statement of financial position”) – this gives a snapshot of a company’s assets, liabilities and equity at a particular point in time. This usually includes: current assets, fixed assets, other assets, current liabilities, long-term liabilities and owner’s equity.
    • Profit and loss (or “income statement”) – this shows income and expenses over a given period of time. Net profit or loss is calculated by subtracting expenses from income.
    • Cash flow – this shows the movement of cash into and out of a company over a given period of time. It is normally split into operating activities, investing activities, or financing activities.
    • Statements of retained earnings (or “statement of changes in equity”) – this shows the change in a company’s retained earnings over a given period. Retained earnings simply refers to any earnings that are retained by the company instead of being distributed to shareholders in the form of dividends.

    You can find out more about financial health ratios by reading the following lesson:

    Introduction to financial health ratios

    How are financial statements regulated?

    Laws, standards and regulations vary from country to country, but a set of guidelines called the Generally Accepted Accounting Principles (GAAP) are used internationally to help ensure an element of uniformity in financial reporting.

    Companies may find that their financial statements are also audited by the relevant government or other independent bodies. This helps to confirm (or challenge) accuracy and fairness in financial reporting, and can also be used for taxation, investment or other purposes.

    You can learn more about company reports by reading the following lesson:

    Company reports – the essentials