In depth into Financial Statements

As I stated in a recent post on this blog, financial statements are how companies report their financial activities. Financial statements are often audited by government agencies, accountants, firms, etc. This audit is done to ensure accuracy and for tax, financing, or investing purposes. These statements are:

1. Balance Sheet or Statement of Financial Position.
2. Profit or Loss Statement or Income Statement.
3. Statement of Changes in Equity or Statement of Stockholders’ Equity.
4. Statement of Cash Flows.

The image below shows how these statements are linked across time.

A financial position or balance sheet reports on a company’s financial position at a point in time. The income statement, statement of stockholders’ equity and the statement of cash flows report on performance over a period of time. The three statements in the middle of the image above (period-of-time statements) link the balance sheet from the beginning to the end of a period.

A one-year, or annual, reporting period is common and is called the accounting, or fiscal, year. Of course, firms prepare financial statements more frequently; semi-annual, quarterly and monthly financial statements are common. Calendar-year companies have reporting periods beginning on January 1 and ending on December 31. Some companies choose a fiscal year ending. Ending on a date other than December 31, such as when sales and inventory are low. For example, a company’s fiscal year ends on the Saturday nearest January 31, after the busy holiday season.

1. Statement of Financial Position (Balance Sheet)

The balance sheet presents in summary form, as of a specific date. It reports the assets owned by the company, the liabilities owed by the company to its suppliers and to lenders who have provided funds for the business and the accumulated funds the owners of the enterprise have invested in and left with the business to cover its operating needs.

2.  Profit or Loss statement (Income Statement)

The income statement summarizes those transactions that produced revenue for the business as a result of selling products (or services) during a period. It also reports those transactions that resulted in expenses for the business. The difference between aggregate revenue and aggregate expenses during a specific period is the net income (or loss) the business earned, also called profit or “the bottom line.”

3.  Statement of Changes in Equity (Statement of Stockholders’ (owners’) Equity)

The income statement summarizes those transactions that produced revenue for the business as a result of selling products (or services) during a period and those transactions that resulted in expenses for the business. The difference between aggregate revenue and aggregate expenses during a specific period is the net income (or loss) the business earned, also called profit or “the bottom line.”

4. The Statement of Cash Flows

The statement of cash flows summarizes the sources of the company’s cash funds during the period and the uses the company made of those funds. It measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments.

NOTE

Investors and financial analysts rely on financial data to analyse the performance of a company and make predictions about the future direction of the company’s stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm’s financial statements.

In my next post I will share in detail the first financial statement.