What are Financial Statements?

Financial statements are formal, written records that a business produces to show its financial health and overall performance. These records offer in-depth information about a company’s revenue, expenses, assets, liabilities, cash flow, ownership, and more.

The production and distribution of accurate, timely financial statements is an essential best practice for businesses of any size, as they’re critical tools for planning, legal compliance, and financing.

Types of financial statements

There are numerous types of financial documents that a business can create, but there are three specific kinds that are most widely used by stakeholders:

Balance sheet

A balance sheet is a summary of a business’ assets, liabilities, and shareholder equity at a particular point in time. It is called a balance sheet because it must always balance—the assets must always equal the sum of the liabilities and shareholder equity. Balance sheets can be distributed as often as required, but they are always a snapshot of the one specific date they are issued, not a view of a longer date range.

Income statement

An income statement reveals how much profit or loss a business experienced during a set period of time, such as annually or quarterly. Income statements show the total revenues a business had and subtracts the total expenses to arrive at how much a business earned or lost. They typically include both operational and non-operational revenues and expenses, so they provide a complete picture of the enterprise’s financial operations.

Statement of cash flow

A statement of cash flow shows what cash money a company is spending and receiving, as well as where that money comes from and where it goes—that is, how cash is flowing in and out of the business. Cash flow statements help establish liquidity, to determine if a company can not only pay its obligations regularly with money on hand, but that its income isn’t tied up in accounts that aren’t easily accessible.

Uses for financial statements

Financial statements are key documents that investors, governments, and businesses themselves use to establish a reliable baseline for their financial status. Some common uses include:

Business monitoring and strategic planning

Businesses use their own financial statements to evaluate their performance and make strategic decisions about growth plans, staffing and salary levels, overall expenditure levels, and more. Because these documents can be used to detect trends over time, companies can more accurately and confidently plan how to approach their short- and long-term futures.

Financial and legal compliance

Financial statements are the main tools companies use when filing tax returns and accurately assessing their tax burdens every year. These statements can also be used to ensure that a company is in full legal compliance with all relevant tax laws, as well as other legal regulations for their property, equipment, or other assets.

Investing and raising capital

Financial statements are a crucial view that stockholders, would-be investors, and / or financial institutions have into the health and performance of a business. They can either choose to invest, disinvest, or decline loan or credit applications based on statement results. Companies with troublesome statement data will struggle to attract (and keep) financing.