A financial statement is an official record of the financial activities of a person, business, or other entity.
For a business enterprise or company, all the important financial information, presented in a structured manner and in a way that is easy to understand, are referred to as financial statements. They characteristically include four basic financial statements, which was accompanied by management discussion and analysis.
- Statement of Financial Position- which is also referred to as balance sheet, that provides reports on a company’s assets, liabilities, and ownership equity at a given point of time.
- Statement of Comprehensive Income – that is also referred to as Profit and Loss statement that provides reports on company’s expenses, income, and profits during a period of time. A Profit & Loss statement provides information about the operation of the enterprise.
- Statement of Changes in Equity – which explains the changes of the company’s equity all through the reporting period
- Statement of cash flows – that reports on a company’s cash flow activities including its operating, investing and financing activities.
For large organizations, these statements are often large and complex and include management discussion and analysis and explanation of financial policies.
Purpose of financial statements
- Owners and managers use financial statements to make important business decisions.
- Employees utilize these reports in making collective bargaining agreements (CBA) with the management in discussing their compensation, promotion and rankings.
- Prospective investors utilize it in assessing the viability of investing in a business.
- Financial institutions use them to decide whether to give a loan or grant a company with fresh working capital or extend debt securities etc.
- Government entities need financial statements to determine the propriety and accuracy of taxes paid by the company.
- General public and Media are also interested in financial statements for a variety of reasons.
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