Financial Statements
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Financial statements are formal records that summarize the financial activities and position of a business over a specific period. They are the primary tool through which a company communicates its financial performance to stakeholders including investors, lenders, regulators, and management. The three core financial statements are the balance sheet, the income statement, and the cash flow statement.
In depth
Each of the three core statements serves a distinct purpose and together they provide a complete picture of a company's financial health. The balance sheet shows what a company owns and owes at a single point in time. The income statement shows how much revenue was generated and what it cost to generate it over a period, resulting in a net profit or loss. The cash flow statement shows how cash moved through the business during the period, broken into operating, investing, and financing activities. A fourth statement, the statement of changes in equity, is also commonly included in full financial reporting packages.
Financial statements are used for a wide range of purposes beyond just reporting. Investors use them to assess profitability, growth trends, and financial stability before making investment decisions. Lenders review them to evaluate creditworthiness and repayment capacity. Management uses them for internal decision-making, budgeting, and performance monitoring. For public companies, financial statements must be prepared in accordance with GAAP or IFRS and audited by an independent third party, adding a layer of credibility and accountability. For private companies and startups, maintaining accurate and well-prepared financial statements from an early stage builds trust with investors and makes due diligence processes significantly smoother.