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What are Financial Statements? Research Team | Posted On Wednesday, December 04,2019, 03:59 PM

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What are Financial Statements?



Financial statements are usually prepared at the end of the year and it gives a summary of the functioning of the business i.e. its cash flows, profits, and growth. Let’s try to understand some basic concepts about financial statements.

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What are The Financial Statements?

Financial statements mainly refer to reports presented by the company’s management and are an indicator of the company’s financial performance and its positions in the market. A financial statement usually includes the company’s balance sheet, the statement of cash flows and profit and loss statement.

These statements are mainly used by a set of people associated with the company. Financial statements are used by the lenders to get an idea of its financial position and determine whether to extend loans to such business houses. On the other hand, financial statements are used by investors to make effective investment decisions. When it comes to company merging, financial statements are used by acquirers to estimate the price that will be offered to buy the business. The tax implied on a company is based on its assets and income and thus the income statement of the company is essential.

For a company, financial statements are a way to communicate with investors and stakeholders. It is required to disclose these facts about the company’s financial position and it also impacts the prices of the shares. Companies listed on the stock exchange must present these statements to the regulatory bodies and government agencies regularly.

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Types of Financial Statements:

Since financial statements are a company’s records it mainly depicts the financial and accounting information relating to a company or a firm. Financial statements are mainly used by tax authorities, investors, financial institutions, stakeholders and regulatory bodies. You can find the flowing reports in a company’s financial statement:

-Balance Sheet: The report that depicts the assets and liabilities of a firm at a certain date is known as the company’s balance sheet. The balance sheet can only be prepared after the preparation of profit and loss statements. 

 -Income Statement: Income statement is the final account of a business for a specific period. It is a measure of the revenue generated and the expenses incurred by the business during the reporting period.

-Cash Flow Statement: A cash flow statement mainly summarizes the current financial situation of the company and shows the changes in the cash balance of the company.

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Objectives of Financial Statement:

The financial statements are mainly used as a reference to gain insight into the operations, financial position and cash flows of a company. This information is mainly used by the stakeholders of the company to understand its functioning and make better financial decisions regarding asset allocation. Though each financial statement has an objective, as a group financial statement have the following objectives:

  • People associated with a company like external authorities, partners or stakeholders need to know the status of the company’s financial health and its earnings. Therefore, financial statements are used to understand the accuracy of the company’s economic assets and liabilities.
  • Financial statements help in understanding the capacity of a company to grow and generate profits. Shareholders and investors make use of this data to make their investment decisions.
  •  It is also used to understand the inner working of the company. It shows the efficiency of the company’s management and how the company is performing to generate profits and enhance growth.
  • Financial statements are also used to get an idea of the accounting policy used by the company.
  • Investors can use a financial statement to derive insight into the company’s cash flows. This data can be mainly used by investors and creditors as a reference to the company’s liquidity and cash requirements.

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Nature of Financial Statement:

When the financial statement of a company is prepared it used facts or data that are recorded chronologically. Firstly the data is recorded in monetary terms. Then this data is processed using the accounting method used by the company. Finally, the data is used to generate the company’s financial statement. Listed below is the nature of financial statements:

Recorded Facts: This is the first step towards the financial statement. Facts are recorded in a monetary form that includes accounts of the company’s fixed assets, cash, trade and receivables.

Accounting Conventions: According to accounting standards companies can only use certain prescribed methods in the process of accounting. Such conventions are used while preparing the financial statements. Companies need to disclose the accounting policies as they are an indicator of the company’s financial position and growth.

Postulates: Postulates play a crucial role during the preparation of financial statements. These are mainly presumptions that we make in accounting. For example, the going concern postulate presumes a business will exist for a long time. Hence, we have to treat assets on a historical cost basis.

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