Financial statements are written records that convey the financial activities and conditions of a business or entity.
Financial statements for businesses usually include income statements, balance sheets, statements of retained earnings and cash flows but may also require additional detailed disclosures depending on the relevant accounting framework. Financial statements are often audited by accounting or auditing firms to ensure accuracy and for tax, financing or investing purposes.
For listed entities, financial analysts rely on data to analyse the performance of, and make predictions about, the future direction of a company's share price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm's financial statements.
The three major financial statement reports are the income statement, balance sheet and statement of cash flows.
The balance sheet provides an overview of assets, liabilities and shareholders' equity as a snapshot in time. The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the financial year.
The balance sheet equation, otherwise known as the accounting equation, can be expressed as Assets = Liabilities + Stockholders' Equity,
The balance sheet identifies how assets are funded, either with liabilities, such as debt, or shareholders' equity, such as retained earnings and additional paid-in capital. Assets are listed on the balance sheet in order of liquidity. Liabilities are listed in the order in which they will be paid.
Short-term or current liabilities are expected to be paid within the year, while long-term or concurrent liabilities are debts expected to be paid in over one year.
Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements. The income statement provides an overview of revenues, expenses, net income and earnings per share. It usually provides two to three years of data for comparison.
The cash flow statement merges the balance sheet and the income statement. Due to accounting convention, net income can fall out of alignment with cash flow. The cash flow statement reconciles the income statement with the balance sheet in three major business activities. These activities include operating, investing and financing activities. Operating activities include cash flows made from regular business operations.
Investing activities include cash flows from the acquisition and disposition of assets, such as real estate and equipment. Financing activities include cash flows from debt and equity investment capital.
Preparing general-purpose financial statements; including the balance sheet, income statement, statement of retained earnings, and statement of cash flows; is the most important step in the accounting cycle because it represents the purpose of financial accounting.
These statements are the end product of the accounting system in any company.
Preparing general-purpose financial statements can be simple or complex depending on the size of the company. Some statements need footnote disclosures while other can be presented without any. Details like this generally depend on the purpose of the financial statements.
Banks often want basic financials to verify that a company can pay its debts, while SARS require audited financial statements from all public companies.
Financial statements are prepared by transferring the account balances on the adjusted trial balance to a set of financial statement templates.