Financial statements (or financial reports) are formal records of a business' financial activities. These statements provide an overview of a business' profitability and financial condition in both short and long term. There are four basic financial statements:[1]
1. Balance sheet: also referred to as statement of financial condition, reports on a company's assets, liabilities and net equity as of a given point in time.
2. Income statement: also referred to as Profit or loss statement, reports on a company's results of operations over a period of time.
3. Cash flow statement: reports on a company's cash flow activities, particularly its operating, investing and financing activities.
4. Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period.
For large corporations, these statements are often complex and may include an extensive set of notes 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 are considered an integral part of the financial statements.
Purpose of 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."[2] Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organisation's financial position. Reported income and expenses are directly related to an organisation's financial performance.
Financial statements are int ...