Financial Statements – are the primary tools of financial reporting, compiled with information from either T-accounts or journal entries. Financial statements provide an overview of a business or person’s financial condition in both short and long term at a particular point in time. All the relevant financial information of a business enterprise, presented in a structured manner and in a form easy to understand, are called the financial statements. There are four basic financial statements:
- Balance sheet: also referred to as statement of financial position or condition, reports on a company’s assets, liabilities, and net equity as of a given point in time.
- Income statement: also referred to as Profit and Loss statement (or a “P&L”), reports on a company’s income, expenses, and profits over a period of time.Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state.
- Statement of retained earnings: explains the changes in a company’s retained earnings over the reporting period.
- Statement of cash flows: reports on a company’s cash flow activities, particularly its operating, investing and financing activities.
*Note on Statement of Cash Flows:
- The Statement of Cash Flows (SCF) provides pertinent information about a firm?s liquidity.
- Cash flow may be as important as net profit as an indicator of performance.
- Bankruptcies have occurred in firms that were reporting positive income. The SCF may signal problems that were not showing up in the income statement.