Financial statements are formal records that reflect the financial activities and position of a business, person, or other entity. These statements provide crucial information for decision-making by various stakeholders, including investors, creditors, and management.
The primary purpose of financial statements is to provide useful information to users who are external to the entity, such as investors, creditors, and regulatory agencies. These statements help users make informed decisions by providing insight into the financial position, performance, and changes in financial position of an entity.
Balance Sheet: Also known as the statement of financial position, it shows the financial standing of an entity at a specific point in time, listing its assets, liabilities, and equity.
Income Statement: This statement details the company’s financial performance over a period of time, showing revenues, expenses, and profits or losses.
Statement of Cash Flows: It explains the changes in cash and cash equivalents, categorizing cash flows into operating, investing, and financing activities.
Statement of Changes in Equity: This statement provides details on changes in the equity portion of the balance sheet, including the distribution of dividends and the issuance or repurchase of shares.
Financial statements are essential as they are the primary means by which an entity communicates its financial information to external users. They allow for the assessment of an entity's ability to generate cash flows, manage its obligations, and sustain its operations.
The preparation and presentation of financial statements follow established accounting principles and standards to ensure consistency, reliability, and comparability of financial information.