Financial Statements

Financial statements are the product of the financial accounting process. A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. For a business enterprise, the financial statements present all the relevant financial information in a structured manner and in a form easy to understand. They typically include four basic financial statements:

Balance sheet, also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and ownership equity at 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 accounts 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.

For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and management discussion and analysis. The notes are considered an integral part of the financial statements, and typically describe each item on the statement in further detail.

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position.

Financial statements may be used for different purposes:

● owners and managers require financial statements to make important business decisions that affect a company’s continued operations; these statements are also used as part of management's annual report to the stockholders;

● employees need these reports in making collective bargaining agreements with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings;

● prospective investors make use of financial statements to assess the viability of investing in a business;

● financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan) to finance expansion and other significant expenditures;

● government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company;

● vendors who extend credit to a business require financial statements to assess the creditworthiness of the business;

● media and the general public are also interested in financial statements for a variety of reasons.

Financial statements have been created on paper for hundreds of years. The growth of the Web has seen more and more financial statements created in an electronic form which is exchangeable over the Web. Common forms of electronic financial statements are PDF and HTML. These types of electronic financial statements have their drawbacks in that it still takes a human to read the information in order to reuse the information contained in a financial statement.

More recently a market driven global standard, XBRL (eXtensible Business Reporting Language¹), which can be used for creating financial statements in a structured and computer readable format, has become more popular as a format for creating financial statements. Many regulators around the world have mandated XBRL¹ for the submission of financial information.

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