Financial Statement Definition & Meaning

Financial statements are documents that show a company’s operations and financial performance. Government authorities, accountants, firms, and others frequently audit financial statements to verify accuracy and for financing, tax, and investing purposes. The financial statements are used to check into the details of particular business transactions as described in the disclosures that come with the financial statements and serve as the foundation for an annual report sent to a company’s investors and the investing community.

Financial statements determine a company’s ability to generate cash, as well as the sources and application of that cash. It is also used to evaluate if a company has the financial means to repay its debts. Financial statements use a trend line to track financial outcomes in order to identify any future profitability difficulties. With most decision-makers, financial statements are the primary source of financial data. That is why the accuracy, validity, and relevancy of the information on these financial statements are so important in financial accounting and reporting.

The financial statement shows if the company is profitable, whether it will continue to be profitable, and whether there are any major issues on the way, such as a steady decline in sales over time. Reviewing the financial statement will provide you a general idea of how the company is doing and whether there are any warning indications of potential future difficulties. The financial statement will be used by a bank or other similar organization to determine how the business is operating and whether further inspection is required.

Issuing financial statements has only a few disadvantages. One significant risk is that they could be manipulated, causing investors to assume that the issuing firm delivered greater outcomes than it actually did. Manipulation of this nature can also lead to a lender issuing debt to a company that cannot actually repay it.

A financial statement is a compilation of a company’s three main reports. It will include the company’s cash flow statement, income statement, and balance sheet. When all three are combined, a comprehensive image of the company’s health appears.

The summary of an organization’s assets, liabilities, and stockholders’ equity is called the balance sheet. The income statement is primarily concerned with a company’s revenues and expenses over a given time period. Lastly, the cash flow statement evaluates a company’s ability to generate cash to pay debts, cover operating expenses, and make investments.

Balance Sheet

A financial statement that shows a company’s assets, liabilities, and shareholders’ equity at a certain point in time and serves as a foundation for calculating rates of return and assessing its capital structure.

Income Statement

It reflects the outcomes of an entity’s performance and financial activities throughout a given reporting period. It typically includes outcomes from the previous month or year, and it may cover numerous time periods for comparability.

Cash Flow Statement

It indicates the variations in an entity’s cash flows over the course of a reporting period. These cash flows are broken down into three main categories and these are the operating cash flows, cash flows from investing activities and financing activities. This also contains all cash outflows for business and investing activities throughout a certain time period.