A financial statement is a formal record of a company’s financial activities and position. It provides a snapshot of the company’s financial performance and health over a specific period, usually a quarter or a year. Financial statements are essential tools for assessing a company’s financial status, making informed investment decisions, and evaluating its overall viability.
There are three primary types of financial statements:
1. Income statement (profit and loss statement): This statement summarises a company’s revenues, expenses, and profits (or losses) over a given period. It shows how much money the company generated from its operations and the costs incurred to generate that revenue. The difference between total revenue and total expenses yields the net income (or net loss) for the period.
2. Balance sheet (statement of financial position): The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It lists the company’s assets (what it owns), liabilities (what it owes), and shareholders’ equity (the residual interest in the company’s assets after deducting liabilities). The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity.
3. Cash flow statement: This statement details the inflows and outflows of cash and cash equivalents during a specified period. It categorises cash flows into operating activities (day-to-day business operations), investing activities (acquiring or disposing of assets), and financing activities (raising capital or repaying debt). The cash flow statement provides insights into a company’s liquidity and cash management.
Financial statements are crucial for investors, creditors, regulators, and management to assess a company’s financial performance, make informed decisions, and ensure compliance with financial reporting standards. They offer a comprehensive view of a company’s financial health, its ability to generate profits and cash flow, and its overall stability.