A financial statement is a written and/or online record that shows a business’ financial performance. A financial statement will include information about income, cash flow, and a balance sheet.
What does each of these three things show?
An income statement looks at a company’s revenues and expenses each month, quarter, and year. If you take away expenses from revenue, that’s the profit figure, and that’s called net income.
A cash flow statement (CFS) is a way of measuring how successfully a business generates cash to pay its debts, operating expenses, and how it funds investments. Investors like to look at a cash flow statement because it allows them to understand better how a company is performing—where is the money coming from and where is the money going? It’s also a great way of knowing if a company is financially stable or not.
Lastly, a balance sheet is what you look at when you want a written overview of a business’ activities and its financial performance. It shows what a company’s assets are, what it owes (rent, taxes, wages, utilities, debt), and how much of its equity is owned by shareholders. Anyone looking at a balance sheet will look at its date to see when that overview was taken. It needs to be up to date. Most balance sheets will be considered at the end of a government tax year.
Who uses them? They’re used for accounting, accountability, tax, and investment purposes. Organizations that typically use them include government agencies, accountancy firms, investment companies, analysts, creditors, and companies to which the statement pertains.
Why Are Financial Statements Important?
As we’ve alluded to, financial analysts and investors look at the data on a financial statement to see how a company is performing. This helps them safely predict how the company will do in the future in terms of profits, losses, and its performance on the stock market.