A financial statement is a set of records or reports businesses maintain that provide details about the organization's or company's financial standing. It provides an overview of an entity's economic performance over a specific period, such as a quarter or a year. A financial statement includes the balance sheet, income statement, statement of cash flow, and statement of changes in equity.
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Why are financial statements important?
Financial statements provide an overview of the company's performance, especially from an economic standpoint. Additionally, financial statements are essential for stakeholders, including investors, creditors, and management, to make informed decisions.
Types of financial statements:
There are four main types of financial statements:
- Balance sheet
- Cash flow statement
- Income statement
- Statement of owner's equity
Balance sheet
A balance sheet is a snapshot of an organization’s financial condition for a specific period. The balance sheet provides information about the company’s assets, liabilities, shareholder equity, and how these terms relate.
Assets:
Any company resource that holds value can be considered an asset. These include liquid cash, inventory, or prepaid expenses, such as rent, insurance, or vendor contracts.
Liabilities:
Liabilities can be considered as money that an organization owes to another person or entity. Liabilities while running a business can be long and short-term. Long-term debts such as interests or bonds could be classified as long-term liabilities. In contrast, payments to vendors for raw materials or employees can be considered short-term liabilities.
Shareholder equity:
Shareholder equity refers to the net assets of the business or organization. Shareholder equity can also be considered as the revenue the organization generates, money invested into the industry by shareholders, or any other investments made.
Cash flow statement
A cash flow statement is a document that provides information about cash-related transactions that flow in and out of an organization over a specific period. A cash flow statement helps understand the company’s ability to manage its financial transactions and gives an overview of its financial position.
Additionally, the primary purpose of a cash flow statement is to provide insights into the operating activities of the company, its investing activities, and overall financial transactions.
Income statement
An income statement is a document that tracks the organization’s revenue, expenses, gains, and losses during a specific period. The income statement, or the profit and loss (P&L) statement, informs individuals about the company’s operations and overperforming and underperforming sectors.
While the balance sheet provides an overall picture of the company’s position, the income statement reveals the profit or loss registered by the company during a specific period.
Statement of owner's equity:
A Statement of Owner's Equity is a financial document that outlines the changes in the owner's equity of a business over a specific period. This statement is also known as the Statement of Changes in Equity. The statement of owner’s equity also shows how the business's equity, or net worth, has changed due to various factors.
In summary, financial statements provide crucial insights into a company's performance, guiding strategic decision-making and fostering investor confidence. By understanding these metrics, stakeholders can make informed choices to ensure the company's sustained growth and stability.
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