Financial statement: Difference between revisions

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{{Short description|Formal record of the financial activities and position of a business, person, or other entity}}

'''Financial statements''' (or '''financial reports''') are a record of a [[business]]' [[financial]] flows and levels.

{{Accounting|expanded=Statements}}

[[File:Wachovia National Bank 1906 statement.jpg|right|thumb|250px|Historical financial statements]]

'''Financial statements''' (or '''financial reports''') are aformal recordrecords of the financial activities and position of a [[business]]', [[financial]]person, flowsor andother levelsentity.

Typically they will include:

Relevant financial information is presented in a structured manner and in a form which is easy to understand. They typically include four basic financial statements<ref>{{cite web |url=https://www.sec.gov/about/reports-publications/investorpubsbegfinstmtguide |title=

*a '''''[[balance sheet]]''''' setting out the net asset position of a business

Beginners' Guide to Financial Statement |date=4 February 2007 |publisher=[[Securities and Exchange Commission]]}}</ref><ref>{{cite book |title=Intermediate Accounting |edition=18 |year=2022 |author1=Donald Kieso |author2=Jerry Weygandt |author3=Terry Warfield |isbn=978-1-119-79097-6 |page=1-3 |chapter=1.1 - Financial Reporting Environment |publisher=John Wiley & Sons |quote=financial statements (income statement, statement of owners’ (stockholders’) equity, balance sheet, and statement of cash flows) are the principal means that a company uses to assess its financial performance.}}</ref> accompanied by a management discussion and analysis:<ref>[http://www.iasplus.com/standard/ias01.htm "Presentation of Financial Statements"] Standard IAS 1, International Accounting Standards Board. Accessed 24 June 2007.</ref>

*an '''''[[income statement]]''''', '''''income and expenditure statement''''' or '''''[[profit and loss account]]'''''

*a '''''[[cash flow statement]]'''''

*a '''''statement of other recognised gains and losses''''' or '''''other comprehensive income statement''''' setting out movements in equity that do not go through the income statement or profit and loss account (eg a revaluation of the value of head office of a manufacturing company)

*'''''[[statement of retained earnings]]'''''

*supplementary notes and management discussion

# A [[balance sheet]] reports on a company's [[asset]]s, [[Liability (financial accounting)|liabilities]], and [[Equity (finance)|owners equity]] at a given point in time.

Today most governments require publicly-traded [[companies]] to issue, and issue in a certain way, annual financial statements. Some governments, such as the [[United Kingdom]] government, require all companies to publish annual financial statements, although smaller companies only need publish them in abbreviated form.

# An [[income statement]] reports on a company's [[income]], [[expense]]s, and [[profit (accounting)|profits]] over a stated period. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the stated period.

# A [[statement of changes in equity]] reports on the changes in [[Equity (finance)|equity]] of the company over a stated period.

# A [[cash flow statement]] reports on a company's [[cash flow]] activities, particularly its operating, [[investing]] and [[financing]] activities over a stated period.

Notably, a balance sheet represents a snapshot in time, whereas the income statement, the statement of changes in equity, and the cash flow statement each represent activities over an [[accounting period]]. By understanding the key functional statements within the balance sheet, business owners and [[financial]] professionals can make informed decisions that drive growth and stability.

==Purpose of financial statements==

==History==

"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions."

Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position.

Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."<ref name="iasplus.com">[http://www.iasplus.com/standard/framewk.htm "The Framework for the Preparation and Presentation of Financial Statements"] International Accounting Standards Board. Accessed 24 June 2007.</ref> Financial statements may be used by users for different purposes:

Financial statements and records have been produced for as far back as there has been human [[writing]]. The people in the old [[Mesopotamian]] societies operated both [[insurance]] and [[credit]] (see [[interest]]) [[corporations]], and had the obvious need of record keeping.

*Owners and managers require financial statements to make important business decisions that affect its continued operations. [[Financial analysis]] is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the [[shareholder|stockholders]].

==Financial condition==

*Employees also need these reports in making [[collective bargaining]] agreements (CBA) with the management, in the case of [[labor unions]] or for individuals in discussing their compensation, promotion and rankings.

*Prospective [[investor]]s make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.

*Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh [[working capital]] or extend debt [[Security (finance)|securities]] (such as a long-term [[bank loan]] or [[debenture]]s) to finance expansion and other significant expenditures.

*Stockholders may from time to time request [[corporate transparency|insight]] into how [[share capital]] is managed, which may be made available via financial statements (or [[stock statement]]s), as it lies in the financial interest of shareowners in affirming that capital stock is handled viably and mindfully with duly care.<ref>{{cite web |title=Accounting standards and value relevance of financial statements: An international analysis |url=https://www.sciencedirect.com/science/article/abs/pii/S0165410101000118 |publisher=Science Direct |doi=10.1016/S0165-4101(01)00011-8 |access-date=1 April 2023}}</ref>

==Consolidated==

Each statement presents financial data relating to a company's or a group's current financial health, business results for the previous period, and other indicators that are used by the company's stakeholders to assess the health of a company. Typically a company's stakeholders will include existing and prospective shareholders, employees and trades unions, the taxation authorities, banks, suppliers and customers.

{{main|Consolidated financial statement}}

Consolidated financial statements are defined as "Financial statements of a group in which the [[asset]]s, [[liability (financial accounting)|liabilities]], [[equity (finance)|equity]], [[income]], [[expense]]s and [[cash flow]]s of the parent (company) and its [[subsidiaries]] are presented as those of a single [[economic entity]]", according to [[International Accounting Standard]] 27 "Consolidated and separate [[financial]] statements", and [[International Financial Reporting Standard]] 10 "Consolidated financial statements".<ref>{{cite web |url=http://www.iasplus.com/en/standards/ias/ias27-2011 |title=IAS 27 — Separate Financial Statements (2011) |publisher=IAS Plus (This material is provided by Deloitte Touche Tohmatsu Limited (“DTTL”), or a member firm of DTTL, or one of their related entities. This material is provided “AS IS” and without warranty of any kind, express or implied. Without limiting the foregoing, neither Deloitte Touche Tohmatsu Limited (“DTTL”), nor any member firm of DTTL (a “DTTL Member Firm”), nor any of their related entities (collectively, the “Deloitte Network”) warrants that this material will be error-free or will meet any particular criteria of performance or quality, and each entity of the Deloitte Network expressly disclaims all implied warranties, including without limitation warranties of merchantability, title, fitness for a particular purpose, non-infringement, compatibility, and accuracy.) |website= www.iasplus.com |access-date=2013-11-29}}</ref><ref>{{cite web |url=http://www.iasplus.com/en/standards/ifrs/ifrs10 |title=IFRS 10 — Consolidated Financial Statements |publisher=IAS Plus (This material is provided by Deloitte Touche Tohmatsu Limited (“DTTL”), or a member firm of DTTL, or one of their related entities. This material is provided “AS IS” and without warranty of any kind, express or implied. Without limiting the foregoing, neither Deloitte Touche Tohmatsu Limited (“DTTL”), nor any member firm of DTTL (a “DTTL Member Firm”), nor any of their related entities (collectively, the “Deloitte Network”) warrants that this material will be error-free or will meet any particular criteria of performance or quality, and each entity of the Deloitte Network expressly disclaims all implied warranties, including without limitation warranties of merchantability, title, fitness for a particular purpose, non-infringement, compatibility, and accuracy.) |website= www.iasplus.com |access-date=2013-11-29}}</ref>

In most territories there is a requirement that financial statements are prepared using specific rules called [[generally accepted accounting practice]] or GAAP. Usually the requirement comes down to preparing financial statements that are '''[[true and fair]]'''. This has not always been the case in the past: for instance, in the UK the requirement used to be ''true and correct''.

==Standards and regulations==

Each territory has developed its own local GAAP over time, making international comparisons of companies difficult. Recently there has been a push towards standardising GAAPs made by the [[International Accounting Standards Board]] ("IASB"). International GAAP has been adopted by [[Australia]] and the [[European Union]] (for publicly-quoted companies only), and is under consideration in [[South Africa]]. The [[United States]] [[Federal Accounting Standards Board]] has committed itself together with the IASB to converge the different GAAPs over time.

Different countries have developed their own accounting principles over time, making international comparisons of companies difficult. To ensure uniformity and comparability between financial statements prepared by different companies, a set of guidelines and rules are used. Commonly referred to as [[Generally Accepted Accounting Principles]] (GAAP), these set of guidelines provide the basis in the preparation of financial statements, although many companies [[voluntary disclosure|voluntarily disclose]] information beyond the scope of such requirements.<ref name=FASB2001>FASB, 2001. [http://www.fasb.org/brrp/brrp2.shtml Improving Business Reporting: Insights into Enhancing Voluntary Disclosures]. Retrieved on April 20, 2012.</ref>

Each territory has developed its own local GAAP over time, making international comparisons of companies difficult. Recently there has been a push towards standardisingstandardizing accounting GAAPsrules made by the [[International Accounting Standards Board]] ("IASB"). IASB develops [[International GAAPFinancial hasReporting Standards]] that have been adopted by [[Australia]], Canada and the [[European Union]] (for publicly- quoted companies only), and isare under consideration in [[South Africa]] and [[International Financial Reporting Standards#Adaptation and convergence|other countries]]. The [[United States]] [[FederalFinancial Accounting Standards Board]] has committedmade itselfa together with the IASBcommitment to converge the differentU.S. GAAP and GAAPsIFRS over time.

==Promotion==

==Management discussion and analysis==

To entice new investors, most public companies assemble their financial statements on fine paper with pleasing graphics and photos, attempting to capture the excitement and culture of the organisation in a "marketing brochure" of sorts.

Management discussion and analysis or MD&A is an integrated part of a company's annual financial statements. The purpose of the MD&A is to provide a narrative explanation, through the eyes of management, of how an entity has performed in the past, its financial condition, and its future prospects. In so doing, the MD&A attempt to provide investors with complete, fair, and balanced information to help them decide whether to invest or continue to invest in an entity.<ref>{{Cite web |url=http://www.cica.ca/research-and-guidance/mda-and-business-reporting/index.aspx |title=MD&A & Other Performance Reporting |access-date=2014-02-19 |archive-date=2022-04-07 |archive-url=https://web.archive.org/web/20220407204821/http://www.cica.ca/research-and-guidance/mda-and-business-reporting/index.aspx |url-status=dead }}</ref>

The section contains a description of the year gone by and some of the key factors that influenced the business of the company in that year, as well as a fair and unbiased overview of the company's past, present, and future.

==Audit==

MD&A typically describes the corporation's [[Accounting liquidity|liquidity position]], capital resources,<ref>{{Cite web |url=http://www.nikoresources.com/2002manage.html |title=Nico Resources Management's Discussion and Analysis |access-date=2014-02-19 |archive-url=https://web.archive.org/web/20061115081547/http://www.nikoresources.com/2002manage.html |archive-date=2006-11-15 |url-status=dead }}</ref> results of its operations, underlying causes of material changes in financial statement items (such as asset impairment and restructuring charges), events of unusual or infrequent nature (such as [[mergers and acquisitions]] or [[share buyback]]s), positive and negative trends, effects of [[inflation]], domestic and international market risks,<ref>{{Cite web |url=http://www.pepsico.com/Annual-Reports/1998/financial/analysis.html |title=PepsiCo Management's Discussion and Analysis |access-date=2014-02-19 |archive-url=https://web.archive.org/web/20120319194828/http://www.pepsico.com/Annual-Reports/1998/financial/analysis.html |archive-date=2012-03-19 |url-status=dead }}</ref> and significant uncertainties.

Although the rules differ between jurisdictions, usually larger companies, and all publicly-quoted companies must have their financial statements independently audited. Note that the auditors do not certify financial statements, that is done by the company's directors. All an auditor does is examine the financial statements and records of a company and opines on whether they do indeed show a "true and fair" view (or meet other particular requirements that the auditor is engaged to opine on).

==See also==

There has been much legal debate over who an auditor is liable to. Since audit reports tend to be addressed to the current shareholders, there is little doubt that they owe a legal duty of care to them. In the UK, they have been held liable to potential investors when the auditor was aware of the potential investor and how they would use the information in the financial statements. Nowadays auditors tend to include in their report liability restricting language, discouraging anyone other than the addressees of their report from relying on it. Liability is an important issue: in the UK, for example, auditors have unlimited liability.

*[[Accountable Fundraising]]

*[[Financial accounting|Corporate financial accounting]]

*[[Financial statement analysis]]

*[[Comprehensive annual financial report]]

*[[Model audit]]

*[[Earnings report]]

==SystemReferences==

{{Reflist}}

==Further reading==

Financial statements can also be representations of business structures as recorded in a [[double-entry book-keeping]] system, and are used to support internal record-keeping and decision-making. While businesses are not obligated to use this format internally, most do keep its basic structure because it is well-understood by employees and well-supported by information systems. In this format, businesses view their financial condition in terms of [[asset]]s, [[liabilities]], and [[Ownership equity|equity]]. Transactions consist of [[debit]]s and [[credit]]s.

* Alexander, D., Britton, A., Jorissen, A., "International Financial Reporting and Analysis", Second Edition, 2005, {{ISBN|978-1-84480-201-2}}

==SeeExternal alsolinks==

{{Library resources box

*[[Accounting]]

|by=no

*[[Auditing]]

|onlinebooks=no

*[[Corporate finance]]

|others=no

*[[Generally accepted accounting principles]]

|about=yes

|label=Financial statement }}

*[http://www.ifrs.org IFRS Foundation & International Accounting Standards Board]

*[http://www.fasb.org Financial Accounting Standards Board] (U.S.)

*[http://www.unece.org/trade/untdid/welcome.htm UN/CEFACT]

*{{cite web|last=Mańko|first=Rafał|title=New legal framework for financial statements|url=http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2013/130552/LDM_BRI(2013)130552_REV1_EN.pdf|work=Library Briefing|publisher=Library of the European Parliament|access-date=6 June 2013}}

* [https://web.archive.org/web/20080523144037/http://www.investopedia.com/university/fundamentalanalysis/notes.asp Fundamental Analysis: Notes To The Financial Statements] by [[Investopedia.com]]

{{Authority control}}

[[Category:Accounting]]

[[Category:Financial statements]]

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