Financial statements are formal records used in financial reporting and analysis to communicate the financial status and performance of an entity. Properly examining financial statements is vital for informed decision-making.
Key Statements
- The income statement gauges profits or losses over time by offsetting earnings against expenses.
- The balance sheet portrays financial standing through assets, liabilities, and equity on a given date.
- Meanwhile, the statement of cash flows provides insight into liquidity by tracking how cash balances change from operational, investment, and funding activities.
Supplementary Reports
Other helpful statements include the statement of retained earnings, which reconciles beginning and ending balances of retained profit. Additionally, the statement of changes in equity accounts for all modifications in equity account totals over a period.
Example Application
By diligently analyzing income statements, an investor recognized a technology firm’s expanding margins and forecasted the potential for continued returns, determining the stock an ideal long-term hold.
Significance
Overall, standardized financial statements allow for performance benchmarking against others while shedding light on a business’s profitability, resources, risks, and operational sustainability to better guide strategic decision-making for managers, backers, lenders, and regulators alike.