Financial statements are the statements that provide the financial performance of an organization at the end of a financial year. It represents a formal record of financial transactions taking place in an organization. These statements help the users of the information in determining the financial position, liquidity, and performance of the organization.
Financial statements reflect the impact of the financial effects of the transactions on the organization. Financial reports is done by both profit and non-profit organizations. It forms a crucial part of the annual report of any organization.
Types of Financial Statements
There are 4 types of financial reports that are required to be prepared by an entity. These statements are:
- Income statement,
- Balance Sheet or Statement of financial position,
- Statement of cash flow,
- Noted to financial statements.
1. Income statement
The income statement of an organization or business entity is the financial statement that contains financial information about the three important components, which are revenues, profit or loss, and expenses incurred during the accounting period.
2. Balance sheet
A balance sheet is known as a statement of financial position as it shows the position of assets, liabilities, and equity at the end of an accounting period. The net worth of a business can be determined by deducting the liabilities from the assets. If the users of financial information are looking for information regarding the financial position of the company, a balance sheet is the most appropriate statement which will present the necessary information. Components of a balance sheet are assets, liabilities, and equity.
3. Statement of Cash Flow
A cash flow statement reveals the movement of cash in an organization. It comprises cash inflows and outflows. Cash flow can be classified into three activities which are operating activities, investing activities, and financing activities.
4. Notes to Accounts
The notes to accounts help users of accounting information in understanding the current financial position of the business and also helps in estimating its future performance. It helps the auditors at the time of auditing financial reports to determine if the accounting policies are properly implemented and are reflected in the statements of the company.