Financial statements, also known as annual accounts, are documents or reports that show a company’s economic and financial information in a structured manner. This information includes assets and debts, financial results obtained, income, and cash outflows.
Financial statements are essential because they present economic and financial information in a structured way, allow you to interpret and analyze this information, and make decisions that benefit the company based on that analysis.
These documents are required and used by the company’s owners, shareholders, and executives to determine assets and liabilities management, profits generation, losses suffered, and cash flow management.
Also, financial statements are required and used by people or entities external to the company, such as:
- Investors: to know the profitability of the company and determine investment participation
- Government entities: to know the results the company obtained and calculate taxes that must be paid
- Banks and financial institutions: to determine if the company will be able to repay the loan you and decide an approval
- Suppliers: to know the creditworthiness of the company and establish a working relationship or credit relationship
The balance sheet shows a company’s assets, liabilities, and equity at a given time.
The balance sheet allows you to analyze the assets and liabilities within a company, including how much was invested, where funds were invested, liabilities management, and earnings.
Statement of Income
The income statement, or profit and loss statement, income statement, or profit and loss account, shows the income, expenses, and results a company has experienced during a specific period, generally one year.
The cash flow statement shows the cash inflows and outflows you experienced within a given period. It allows you to examine how your company has obtained and spent income and what amount is available at the end of that period. This information lets you determine whether to buy additional merchandise or apply for credit.
Other Financial Statements
The balance sheet, the income statement, and the cash flow are the main financial statements; however, there are others that are beneficial to compile and review:
- Statement of changes in equity: The statement of changes in equity, or surplus statement, shows changes in equity within a given period. These changes include variations in contributions made by the partners or shareholders of the company and changes in the use or distribution of the profits.
- Statement of changes in the financial situation: The statement of changes in the financial situation, also known as the statement of movements of funds, shows the origin of funds and movement during a determined period.
- Memory: Memory, or notes of financial statements, presents information that helps expand the information in the other financial statements. Memory additionally explains relevant information that could be difficult to interpret or analyze.
Types of Financial Statements
Financial statements are usually classified according to their functionality:
- Projected financial statements: These are financial statements that show projected figures, that is, figures that have been predicted for a date or period in the future. They are used to project the results achieved in the future and determine if the company will be profitable.
- Audited financial statements: These are financial statements whose information has been reviewed and verified by independent auditors or public accountants. They are required when a company is listed on the stock exchange.
- Consolidated financial statements: These are financial statements presented by different companies or independent bodies as if they were a single entity. They are used to analyze a multinational company financially.