The three most important financial statements are the balance sheet, the income statement, and the cash flow statement.
These three statements together show the assets and liabilities of a business, its revenues and costs, as well as its cash flows from operating, investing, and financing activities.
Financial Statements are useful for the following reasons:
To determine the ability of a business to generate cash, and the sources and uses of that cash.
To determine whether a business has the capability to pay back its debts.
To track financial results on a trend line to spot any looming profitability issues.
To derive financial ratios from the statements that can indicate the condition of the business.
To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.
To use as the basis for an annual report, which is distributed to a company’s investors and the investment community.
There are few downsides to issuing financial statements. A possible concern is that they can be fraudulently manipulated, leading investors to believe that the issuing entity has produced better results than was really the case. Such manipulation can also lead a lender to issue debt to a business that cannot realistically repay it.
One of the financial statements is the balance sheet. It shows an entity's assets, liabilities, and stockholders' equity as of the report date.
Another financial statement is the income statement. It shows the results of an entity's operations and financial activities for the reporting period.
The final financial statement is the statement of cash flows. It shows changes in an entity's cash flows during the reporting period. These cash flows are divided into cash flows from operating activities, investing activities, and financing activities.
When financial statements are issued to outside parties, then also include supplementary notes.
If a business plans to issue financial statements to outside users (such as investors or lenders), the financial statements should be formatted in accordance with one of the major accounting frameworks