A financial statement is a document, or a set of documents, that serves as a formal record of the financial activities of a company or an individual within a specified period of time. The financial statement contains all the details about the income and expenses of the company or the individual.
This document can be used for a variety of purposes. For companies, the financial statement is important for creditors, shareholders, and potential buyers. This is due to the simple fact that the financial statement is a reflection of the financial status of the company and can be used to make decisions. Creditors, for example, can evaluate the financial statement of a company when deciding whether or not to approve a loan. Potential buyers can also gather a lot of relevant information from the financial statement of a company. This information may very well determine whether its worth buying the company or not. More so, employees can make use of the company’s financial statement when it comes to collective bargaining agreements (CBAs), as well as conducting other negotiations with the management.
A financial statement is typically broken down into several documents - all of which are also called financial statements. Usually, these documents are:
Balance sheet. This report contains information on the company’s assets, liabilities, and ownership equity.
Income statement. Another term for this report is profit and loss statement (P&L). It contains information on the income, expenses, and profit (or loss) of the company.
Statement of retained earnings. This report reflects change in the retained earnings of the company, if any, within the fiscal period.
Statement of cash flows. This report shows the flow of cash with respect to operations, financing, and investments.