Definition: Financial statements are a collection of reports about an organization's financial results and condition. They are useful for the following reasons:
- To determine the ability of a business to generate cash, and the sources and uses of that cash.
- To determine whether a business has the capability to pay back its debts.
- To track financial results on a trend line to spot any looming profitability issues.
- To derive financial ratios from the statements that can indicate the condition of the business.
- To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.
The standard contents of a set of financial statements are:
- Balance sheet. Shows the entity's assets, liabilities, and stockholders' equity as of the report date.
- Income statement. Shows the results of the entity's operations and financial activities for the reporting period.
- Statement of cash flows. Shows changes in the entity's cash flows during the reporting period.
- Supplementary notes. Includes explanations of various activities, additional detail on some accounts, and other items as mandated by GAAP or IFRS.
If a business plans to issue financial statements to outside users (such as investors or lenders), the financial statements should be formatted in accordance with one of the major accounting frameworks, such as GAAP or IFRS. These frameworks allow for some leeway in how financial statements can be structured, so statements issued by different firms even in the same industry are likely to have somewhat different appearances.
If financial statements are issued strictly for internal use, there are no guidelines, other than common usage, for how the statements are to be presented.
At the most minimal level, a business is expected to issue an income statement and balance sheet to document its monthly results and ending financial condition. The full set of financial statements is expected when a business is reporting the results for a full fiscal year.
What are comparative financial statements?
What are consolidated financial statements?
What are pro forma financial statements?
What are the qualitative characteristics of financial statements?
What is a financial statement error correction?