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Financial Statements
Financial statements (or financial reports) are formal records of the financial activities andposition of a business, person, or other entity.
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 accompanied by a management discussion and analysis
1. A balance sheet or statement of financial position, reports on a company’s assets, liabilities, and owners equity at a given point in time.
2. An income statement—or profit and loss report (P&L report), or statement of comprehensive income, or statement of revenue & expense—reports on a company’s income, expenses, and 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.
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4. 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 single point in time, where the income statement, the statement of changes in equity, and the cash flow statement each represent activities over a stated period.)
Analysis of Financial statements
Financial statement analysis involves gaining an understanding of an organization’s financial situation by reviewing its financial reports. The results can be used to make investment and lending decisions. This review involves identifying the following items for a company’s financial statements over a series of reporting periods:
A. Trends. Create trend lines for key items in the financial statements over multiple time periods, to see how the company is performing. Typical trend lines are for revenue, the gross margin, net profits, cash, accounts receivable, and debt.
B. Proportion analysis. An array of ratios are available for discerning the relationship between the size of various accounts in the financial statements. For example, one can calculate a company’s quick ratio to estimate its ability to pay its immediate liabilities, or its debt to equity ratio to see if it has taken on too much debt. These analyses are frequently between the revenues and expenses listed on the income statement and the assets, liabilities, and equity accounts listed on the balance sheet.
Financial statement analysis is an exceptionally powerful tool for a variety of users of financial statements, each having different objectives in learning about the financial circumstances of the entity.
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