Monday, January 14, 2008

Financial Statements

Financial statements (or financial reports) are a record of a business' financial flows (revenues/expenses) and levels (assets/liabilities). The big four statements are :
  1. Balance sheet which describes a company's assets, liabilities and net equity at both a specific point of time and at the beginning of the period of time. The balance sheet is the longest established of the main financial statements produced by a business.
  2. Income statement which describes a company's income, expenses and net income/loss over a period of time.
  3. Cash flow statement which describes how much cash was used in corporate operating, investment, and financing activities over a period of time.
  4. Statement of changes in shareholder equity which reconciles the difference between the equity at the two different points in time.

Purposes of Financial Statements

Financial Statements generally have two purposes. They help managers manage the profit, cash flows, and financial condition of a business. They also serve as a pipeline of information to business lenders and investors. Without this financial information, lenders would balk at loaning money to a business and investors would refuse to invest their hard-earned money in a business.

Consistency requires that a company should use the same rules of measurement and valuation from year to year in its financial statements.

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