The purpose of a company’s financial statement is to inform the readers about the financial operations, revenue, and expenditures registered within a certain period (Fontinelle 2017). Differently put, in a financial statement, a company tells the public how much money it has earned and paid over a particular time frame. Also, financial statements usually cover periods of different length. Some of the most common are quarterly and annual statements that cover periods of one quarter or an entire year accordingly.
In a quarterly statement, a reader will be able to find more specific information in reference to the company’s performance during certain months or a season, whereas in an annual financial statement, a reader may find more general information about the company’s overall position in the market throughout a whole year. The readers may pick one of these two types of financial statements depending on the specific kind of information that they intend to learn.
Since the business and financial markets tend to be very unstable, it is likely that a company would experience several periods of up and downs throughout a year or a quarter in regard to sales, investment, and the overall business performance. Financial statements have a purpose of presenting full and detailed information concerning the experiences faced by a business over a chosen time frame in order to inform the readers about its position in general; this is done because the overall financial performance of a company, as well as its position in the market, is not defined by individual cases of its affairs within a period but by the sum of its losses and gains.
In many companies, different parts of a year may be characterised as more and less successful financially, some may be seen as stagnant or lacking activity, and some may be extremely busy and intense. It especially concerns the firms and organisations whose performance varies seasonally due to the activity of their consumer segments. In that way, financial statements are important for the professionals because they carry all the necessary information for the analysis of the overall state of a business and its potential perspectives and opportunities for the future.
By definition, financial statements are formal documentations of the financial activities of an organisation; they represent written reports that provide information regarding liquidity and financial strength of a company, and the effects produced by the organisation’s transactions on its performance in the market (What are financial statements? 2017).
Also, speaking about financial statements, it is important to mention that there exist four major types of such records. The first type is the statement of financial position that is also referred to as the balance sheet; the primary function of this document is to deliver information about a company’s financial position in regard to a particular period (What are financial statements? 2017). Balance sheets are usually comprised of three main elements that are assets (the resources and properties owned by a business), liabilities (the debts of an organisation or finances owed to another party), and equity (the finances owed by a business to its owners).
The second type is an income statement that represents a formal report filed by a company in regard to its financial performance; it is also referred to as the statement of profit and loss (What are financial statements? 2017). This document contains two major elements – income (or the revenue earned by the business) and expenses (the costs paid by the business over a reviewed period). The correlation of the two elements translates into the net profit or loss of the business.
The third type is a cash flow statement; it reflects the bank balances and movements of cash. The latter movements are subdivided into such elements as operating activities that reflect the flow of cash from the major transactions of a business, investing activities that show the movement of cash from sale and purchase of resources, and financial activities that stand for the flow of cash generated from dividends, payments of interest, and debt repayment (What are financial statements? 2017).
Finally, the fourth type is the statement of changes in equity that is also referred to as the statement of retained earnings. Equity stands for the difference between a company’s assets and liabilities owned over a specific period; and its movement is characterised by several elements such as net profit or net loss, dividend payments, issues or repaid share capital, effects produced by accounting errors or their corrections, and the overall gains and losses (What are financial statements? 2017).
The aforementioned components can be included in financial statements collectively, or a statement can present a scope of information focusing on a specific set of aspects of the financial performance of the organisation. In that way, based on the themes and types of statements and documentation mentioned above, one can see clearly how high the value of such statements can be for someone interested in making an investment into a certain business.
In particular, investors are especially sensitive to the financial performance, losses, and gains of a company because they are interested in receiving a return on their investment. The decision-making process involved in the solutions regarding investment is extremely complicated and is tightly connected to a wide range of diverse factors and determinants. As a result, it is critical for an investor to make a correct decision as the responsibility is very high. In that way, investors are to carry out a very thorough and detailed analysis of the companies in whose activities they plan to invest.
There exist several different sources from which an investor may receive information related to their potential investment; such sources are financial news, forums, latest research, and financial statements of various organisations and firms. The latter sources of information are particularly valuable because they carry primary information that has not been processed by any analysis yet so that the investors are free to analyse it independently or by means of engaging trusted professionals. Overall, financial statements of the companies stand for their transparency and honesty before all the stakeholders including the potential investors.
References
Fontinelle, A 2017, Value investing: finding value in income statements. Web.
What are financial statements? 2017. Web.