INTRODUCTION TO FINANCIAL STATEMENTS
Financial Statements represents the financial health of an organization. Following financial statements must be released annually by all corporations as per US GAAP guidelines in the interest of its investors and stakeholders –
- Income Statement; Statement of Retained earnings
- Balance Sheet
- Statement of Cashflow
- Notes to Financial Statements
The notes captured on each financial statement are aligned as per full disclosure principle and provide justifications regarding the amounts appearing or not appearing on the financial statements.
1. INCOME STATEMENT
The Income Statement summarizes the revenues and the expenses of a corporation for an accounting period. This financial statement is also referred by names as Statement of Income, Statement of Operations, Statement of Earnings, Profit & Loss Statement (or P&L).
2. STATEMENT OF RETAINED EARNINGS
In an ideal scenario, companies are expected to distribute all of their profits to its investors & shareholders at the end of their operating cycle. However in practice, this never happens. Organizations tend to hold a major portion of their profits, termed as retained earnings for financing its future investments.
The Statement of Retained Earnings as prepared by organizations, details changes in the volume of these retained earnings as accumulated by the organization over periods.
3. BALANCE SHEET
Balance sheet depicts the financial position of a business entity at a specified moment in time (instead of for a period). It reflects the asset and the equity (liability & shareholders’ equity) holdings of an entity at an instant of time. At times, it is also referred to as Statement of Financial Position.
4. STATEMENT OF CASHFLOWS (SCF)
A separate document for reporting cash flows is required because accrual basis of accounting is being used by most of the corporate companies for financial reporting. Under this accounting practice, companies are required to report revenues as soon as they are earned; regardless of when the money is actually received. Therefore, the income statement provides insights only of how a business is doing in terms of revenue & expenses. It doesn’t report any information on the company’s actual cash inflows and outflows. Thus, there is a need for a separate financial statement to address this gap called statement of cash flows (SCF).
5. NOTES TO FINANCIAL STATEMENTS
The full disclosure principle bounds the accountant to disclose all the relevant information that can hamper or affect the decision making of investors, creditors and other stakeholders in the entity within the notes of the financial statements.
USERS OF FINANCIAL STATEMENTS
The financial statements as issued by corporations are of great value to several stakeholders within and outside the organization. A few of these are captured as below –
- Financial Analysts
- Stockholders
- Current & Future Suppliers of Goods and Services
- Customers
- Labor Unions
- Competitors
- Current Investors & Creditors
- Potential Investors & Creditors
These users often use these financial statements to analyze corporation’s financial health by comparing it either with their own previous statements or with the financial statements of other corporations.