Financial Statements are accounting reports issued periodically by the company with respect to their previous performance. It is essential for US companies to file their finance Statements with the Securities and Exchange Commission (SEC), either annually or quarterly. This report has to be forwarded to every shareholder annually.
Thus, these financial statements are tools through which financial analysts, investors and third parties like the creditors gain information about a company. It even serves as a tool for the managers of the company to obtain information for making financial decisions.
Generally Accepted Accounting Principles (GAAP)
It is a standard format or rules followed for making reports by public companies. It makes it easier to compare the financial statement of one company with other. This kind of information acts as an assurance for the investors.
Types of Financial Statements
Four types of financial statements: the income statement, balance sheet, stockholders' equity statement and cash flows statement are issued by each public company.
• Balance Sheet
It lists the liabilities and assets of a firm, thereby providing a clear picture of the company's financial position at any given time. It also contains the shareholder's equity.
• Assets
It includes long-term assets, such as land, equipment, facilities, patents, and goodwill as well as current assets, such as account receivables, inventories, cash etc. Assets also include expenses which are to be written off.
• Liabilities
It includes long-term liabilities, such as deferred taxes, capital lease obligations and also current liabilities, such as notes and accounts payable. The liabilities of a company must also include share holders' equity.
• Shareholders' Equity
Total liabilities is the sum total of current and long-term liabilities. Shareholders' equity, also known as the book value of equity, is the difference between the company’s assets and their total liabilities. It pictures the net worth of the firm. As the book values of liabilities and assets differ from their market value, it is very difficult to give an exact proposition. The assets and liabilities of a firm are based not on market value, but on historical costs. Thus, the true value of a firm's equity cannot be accurately obtained by the book value.
• Balance Sheet Analysis
Information, such as the Debt-equity ratio and market to book financial ratio can be obtained from analysis of balance sheet.
• Income Statement
Also known as the profit and loss statement, it lists the expenses and revenues of the company over a fixed period of time. The ending line of the income statement determines the firm's net income, which is a profitability measure.
• Statement of Cash Flows
The amount of cash the firm earns is not provided in the income statement. The net income do not relate to cash earned because of two reasons. The first reason is that the income statements contain non-cash entries like depreciation. Secondly, activities like purchase of a facility or expenditures are not addressed by the income statement. The cash flows usually determine the cash generated by the company as well as the cash allocated by the company at different periods of time. The cash flows usually obtain the required information from balance sheet and income statement.
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