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Financial statements (or financial reports) are formal records of the financial activities and position 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 Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to und ...
: # A
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
or statement of financial position, reports on a company's
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s,
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, re ...
, and owners equity at a given point in time. # An
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
—or profit and loss report (P&L report), or statement of comprehensive income, or statement of revenue & expense—reports on a company's
income In microeconomics, income is the Consumption (economics), consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms.Smith's financial dictionary. Smith, Howard Irving. 190 ...
,
expenseExpenditure is an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. For students or parent ...
s, 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. # A
statement of changes in equity A statement of changes in equity and similarly the statement of changes in owner's equity for a , statement of changes in partners' equity for a , statement of changes in shareholders' equity for a or statement of changes in taxpayers' equity for ...
or statement of equity, or statement of retained earnings, reports on the changes in
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
of the company over a stated period. # A
cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statements, financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the a ...
reports on a company's
cash flow A cash flow is a real or virtual movement of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...
activities, particularly its operating,
investing Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is to generate a Return ( ...
and
financingFunding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses i ...
activities over a stated period. # A comprehensive income statement involves those other comprehensive income items which are not included while determining net income. (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''.) For large corporations, these statements may be complex and may include an extensive set of footnotes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.


Purpose for financial statements

"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.""The Framework for the Preparation and Presentation of Financial Statements"
International Accounting Standards Board. Accessed 24 June 2007.
Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position. Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently." Financial statements may be used by users for different purposes: *Owners and managers require financial statements to make important business decisions that affect its continued operations.
Financial analysis Financial analysis (also referred to as financial statement analysis or accounting analysis or Analysis of finance) refers to an assessment of the viability, stability, and profitability of a business, sub-business or project. It is performed by p ...

Financial analysis
is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders. *Employees also need these reports in making
collective bargaining Collective bargaining is a process of negotiation between employers and a group of employees aimed at agreements to regulate working salaries, working conditions, benefits, and other aspects of workers' compensation and rights for workers. The int ...
agreements (CBA) with the management, in the case of
labor unions A trade union (or a labor union in American English), often simply referred to as a union, is an organization of workers who have come together to achieve common goals, such as protecting the integrity of their trade, improving safety standard ...
or for individuals in discussing their compensation, promotion and rankings. *Prospective
investor An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Types ...
s make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. *Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh
working capital Working capital (abbreviated WC) is a financial metric which represents available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a ...
or extend debt
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
(such as a long-term
bank loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avail ...
or
debentures In corporate finance, a debenture is a medium- to long-term debt financial instrument, instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either create ...
) to finance expansion and other significant expenditures.


Consolidated

Consolidated financial statements are defined as "Financial statements of a group in which the
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s,
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, re ...
,
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
,
income In microeconomics, income is the Consumption (economics), consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms.Smith's financial dictionary. Smith, Howard Irving. 190 ...
,
expenseExpenditure is an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. For students or parent ...
s and
cash flow A cash flow is a real or virtual movement of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...
s of the parent (company) and its
subsidiaries A subsidiary, subsidiary company or daughter company is a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture ...
are presented as those of a single
economic entity In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compa ...
", according to
International Accounting Standard International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus a ...
27 "Consolidated and separate
financial Finance is a term for the management, creation, and study of money and investments. Pamela Drake and Frank Fabozzi (2009)What Is Finance?/ref> Specifically, it deals with the questions of how an individual, company or government acquires money ...

financial
statements", and
International Financial Reporting Standard International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus a ...
10 "Consolidated financial statements".


Government

The rules for the recording, measurement and presentation of
government financial statementsGovernment financial statements are annual financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is pres ...
may be different from those required for business and even for non-profit organizations. They may use either of two
accounting methods A basis of accounting is the time various financial transactions are recorded. The cash basis (EU VAT vocabulary ''cash accounting'') and the accrual basisAccrual (''accumulation'') of something is, in finance, the adding together of interest or ...
: accrual
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
, or cost accounting, or a combination of the two (
OCBOA Other comprehensive basis of accounting (OCBOA) in United States accounting refers to a system of accounting other than GAAP. As explained in the ''Journal of Accountancy'', under Statement on Auditing Standards (United States)br> No. 62, Special ...
). A complete set of
chart of accounts A chart of accounts (COA) is a list of financial accounts set up, usually by an accountant, for an organization, and available for use by the bookkeeper for recording transactions in the organization's general ledger In bookkeeping, a general ...
is also used that is substantially different from the chart of a profit-oriented business.


Personal

Personal financial statements may be required from persons applying for a
personal loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
or
financial aid Student financial aid in the United States is funding that is available exclusively to students attending a Higher education in the United States, post-secondary educational institution in the United States. This funding is used to assist in cove ...
. Typically, a personal financial statement consists of a single form for reporting personally held assets and liabilities (debts), or personal sources of income and expenses, or both. The form to be filled out is determined by the organization supplying the loan or aid.


Audit and legal implications

Although laws differ from country to country, an
audit An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...

audit
of the financial statements of a
public company A public company, publicly traded company, publicly held company, publicly listed company, or public limited company is a company whose ownership is organized via shares of share capital, stock which are intended to be freely traded on a stock ...
is usually required for investment, financing, and tax purposes. These are usually performed by independent accountants or auditing firms. Results of the audit are summarized in an
audit report The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as an assurance services, assurance service in order for the user ...
that either provide an unqualified opinion on the financial statements or qualifications as to its fairness and accuracy. The audit opinion on the financial statements is usually included in the annual report. There has been much legal debate over who an auditor is liable to. Since audit reports tend to be addressed to the current shareholders, it is commonly thought that they owe a legal duty of care to them. But this may not be the case as determined by common law precedent. In Canada, auditors are liable only to investors using a prospectus to buy shares in the primary market. In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
, they have been held liable to potential investors when the auditor was aware of the potential investor and how they would use the information in the financial statements. Nowadays auditors tend to include in their report liability restricting language, discouraging anyone other than the addressees of their report from relying on it. Liability is an important issue: in the UK, for example, auditors have
unlimited liability An unlimited company or private unlimited company is a hybrid company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mix ...
. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, especially in the post-
Enron Enron Corporation was an American energy In physics, energy is the physical quantity, quantitative physical property, property that must be #Energy transfer, transferred to a physical body, body or physical system to perform Work (thermod ...
era there has been substantial concern about the accuracy of financial statements. Corporate officers—the
chief executive officer A chief executive officer (CEO), chief administrator officer, or just chief executive (CE), is one of a number of corporate executives A corporation is an organization—usually a group of people or a company A company, abbreviated as c ...
(CEO) and
chief financial officer The chief financial officer (CFO) is the officer An officer is a person who has a position of authority In the fields of sociology Sociology is the study of society, human social behaviour, patterns of social relationships, social intera ...
(CFO)—are personally responsible for fair financial reporting that provides an accurate sense of the organization to those reading the report.


Standards and regulations

Different countries have developed their own accounting principles over time, making international comparisons of companies difficult. To ensure uniformity and comparability between financial statements prepared by different companies, a set of guidelines and rules are used. Commonly referred to as
Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms oper ...
(GAAP), these set of guidelines provide the basis in the preparation of financial statements, although many companies voluntarily disclose information beyond the scope of such requirements.FASB, 2001
Improving Business Reporting: Insights into Enhancing Voluntary Disclosures
Retrieved on April 20, 2012.
Recently there has been a push towards standardizing accounting rules made by the
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent, accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
("IASB"). IASB develops
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
that have been adopted by
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...

Australia
, Canada and the
European Union The European Union (EU) is a political and economic union of member states that are located primarily in Europe Europe is a which is also recognised as part of , located entirely in the and mostly in the . It comprises the wester ...

European Union
(for publicly quoted companies only), are under consideration in
South Africa South Africa, officially the Republic of South Africa (RSA), is the southernmost country in Africa. With over 60 million people, it is the world's 23rd-most populous nation and covers an area of . South Africa has three capital citie ...

South Africa
and other countries. The
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
has made a commitment to converge the U.S. GAAP and IFRS over time.


Inclusion in annual reports

To entice new investors, public companies assemble their financial statements on fine paper with pleasing graphics and photos in an annual report to shareholders, attempting to capture the excitement and culture of the organization in a "marketing
brochure A brochure is an informative paper document (often also used for advertising) that can be folded into a template, , or . A brochure can also be a set of related unfolded papers put into a pocket folder or packet. Brochures are promotional documen ...
" of sorts. Usually the company's chief executive will write a letter to shareholders, describing management's performance and the company's financial highlights. In the United States, prior to the advent of the internet, the annual report was considered the most effective way for corporations to communicate with individual shareholders. Blue chip companies went to great expense to produce and mail out attractive annual reports to every shareholder. The annual report was often prepared in the style of a
coffee table book A coffee table book, also known as a cocktail table book, is an oversized, usually hardcover, hard-covered book whose purpose is for display on a coffee table, table intended for use in an area in which one entertains guests and from which it can ...
.


Notes

Additional information added to the end of financial statements that help explain specific items in the statements as well as provide a more comprehensive assessment of a company's financial condition are known as notes (or "notes to financial statements"). Notes to financial statements can include information on
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
, accounts,
contingent liabilities Contingent liabilities are Liability (financial accounting), liabilities that may be incurred by an entity depending on the outcome of an uncertain future event such as the outcome of a pending lawsuit. These liabilities are not recorded in a compa ...
, on
going concernA going concern is a business Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise entered int ...
criteria, or on contextual information explaining the financial numbers (e.g. to indicate a lawsuit). The notes clarify individual statement line-items. Notes are also used to explain the accounting methods used to prepare the statements and they support valuations for how particular accounts have been computed. As an example: If a company lists a loss on a
fixed asset Fixed assets, also known as long-lived assets, tangible assets or property, plant and equipment (PP&E), is a term used in accounting for assets and property that cannot easily be converted into cash. Fixed assets are different from current asset ...
impairment line in their income statement, the notes may state the reason for the impairment by describing how the asset became impaired. In
consolidated financial statement Consolidated financial statements are the "financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is pr ...
s, all
subsidiaries A subsidiary, subsidiary company or daughter company is a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture ...
are listed as well as the amount of ownership (
controlling interest A controlling interest is an ownership interest in a corporation with enough voting stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade ...
) that the
parent company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
has in the subsidiaries. Any items within the financial statements that are valuated by estimation are part of the notes if a substantial difference exists between the amount of the estimate previously reported and the actual result. Full disclosure of the effects of the differences between the estimate and actual results should be included.


Management discussion and analysis

Management discussion and analysis or MD&A is an integrated part of a company's annual financial statements. The purpose of the MD&A is to provide a narrative explanation, through the eyes of management, of how an entity has performed in the past, its financial condition, and its future prospects. In so doing, the MD&A attempt to provide investors with complete, fair, and balanced information to help them decide whether to invest or continue to invest in an entity. The section contains a description of the year gone by and some of the key factors that influenced the business of the company in that year, as well as a fair and unbiased overview of the company's past, present, and future. MD&A typically describes the corporation's liquidity position, capital resources, results of its operations, underlying causes of material changes in financial statement items (such as asset impairment and restructuring charges), events of unusual or infrequent nature (such as
mergers and acquisitions In corporate finance Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, ...
or share buybacks), positive and negative trends, effects of
inflation In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a r ...

inflation
, domestic and international market risks, and significant uncertainties.


Move to electronic statements

Financial statements have been created on paper for hundreds of years. The growth of the Web has seen more and more financial statements created in an electronic form which is exchangeable over the Web. Common forms of electronic financial statements are PDF and HTML. These types of electronic financial statements have their drawbacks in that it still takes a human to read the information in order to reuse the information contained in a financial statement. More recently a market driven global standard,
XBRL XBRL (eXtensible Business Reporting Language) is a freely available and global framework for exchanging business information. XBRL allows the expression of semantic meaning commonly required in business reporting Business reporting or enterpr ...
(Extensible Business Reporting Language), which can be used for creating financial statements in a structured and computer readable format, has become more popular as a format for creating financial statements. Many regulators around the world such as the
U.S. Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash ...
have mandated XBRL for the submission of financial information. The
UN/CEFACT UN/CEFACT is the United Nations Centre for Trade Facilitation and Electronic Business. It was established as an intergovernmental body of the United Nations Economic Commission for Europe (UNECE) in 1996 and evolved from UNECE's long tradition of wo ...
created, with respect to Generally Accepted Accounting Principles, ( GAAP), internal or external
financial reporting Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to und ...
XML Extensible Markup Language (XML) is a markup language #REDIRECT Markup language In computer text processing, a markup language is a system for annotation, annotating a document in a way that is Syntax (logic), syntactically distinguishable fro ...

XML
messages to be used between enterprises and their partners, such as private interested parties (e.g. bank) and public collecting bodies (e.g. taxation authorities). Many regulators use such messages to collect financial and economic information.


See also

* Accountable Fundraising *
Center for Audit Quality The Center for Audit Quality (CAQ) is an autonomous, nonpartisan Nonpartisanism is a lack of affiliation with, and a lack of bias toward, a political party A political party is an organization that coordinates candidates to compete in a ...

Center for Audit Quality
(CAQ) * Corporate financial accounting *
Financial statement analysis Financial statement analysis (or financial analysis) is the process of reviewing and analyzing a company's financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business ...
* Comprehensive annual financial report * Model audit


References


Further reading

* Alexander, D., Britton, A., Jorissen, A., "International Financial Reporting and Analysis", Second Edition, 2005,


External links


IFRS Foundation & International Accounting Standards BoardFinancial Accounting Standards Board
(U.S.)
UN/CEFACT Trade And Business Group Accounting And Audit
*
Fundamental Analysis: Notes To The Financial Statements
by Investopedia.com
The Notes to the Financial Statements May Be Worth Noting
by Googobits.com {{Authority control Financial statements