A financial statement is a formal record of the financial activities of a business.
All the relevant financial information is presented in a structured manner and in a form that is easy to understand. These typically include basic financial statements that are accompanied by a management discussion and analysis.

The basic financial statements are the following:

  1. Balance sheet.
  2. Income statement.
  3. Statement of cash flows.

Purpose of financial statements

The objective of any financial statement is to provide information on the financial position of a business. It must br 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 the financial position of any organization.

Financial statements are intended to be understandable by readers who have previous knowledge of business and economic activities and accounting. They must be willing to study the information diligently. These financial statements can be used for the following purposes:

  • Owners and managers need the financial statements in order to make important business decisions. These will affect its continued operations. The statements are subjected to a financial analysis in order to provide management with a more detailed understanding of the figures. They are also used as a part of the annual report to shareholders.
  • Employees need these reports to make collective bargaining agreements with the management. This can be in the case of labor union disputes or for the individuals to discuss their employment situation.
  • Prospective investors make use of the financial statements in order to assess the viability of investing in any business. These investors get the financial statements analyzed by a financial analysts to provide them with the basis for making any investment choices.
  • Financial institutions use the statements to decide whether to grant a business with fresh working capital or extend their debt securities in order to finance expansion or other major expenditures.

Inclusion in annual reports.

In order to make the business more appealing to investors, public companies assemble their financial statement on fine paper and use a wide range of graphics and photos in an annual report to shareholders. They attempt to capture the excitement and culture of the organization in a brochure of some kind. Generally, the company’s chief management will write a letter to the company’s shareholders to describe management’s performance and he company’s financial highlights.