Financial Statements Definition

Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial information.

Purpose Of Financial Statements

The purpose of financial statements is twofold. First, it provides a historical trial and record of the organization’s financial information. Secondly, the users of these statements take important decisions by placing reliance on these statements.

4 Basic Financial Statements

Generally, there are four basic types of financial statements. These are Balance Sheet, Income Statement, Cash Flows Statement and Statement of changes in Equity. An additional statement called notes to the financial statements is also prepared to contain the explanations of the figures reported on the face of the four statements. It is usually prepared as required by the GAAP and other accounting bodies to enhance the understandability of the users.

Financial Statements Example

Balance Sheet: Balance sheet contains the balances of assets, liabilities, and equity at a specific date and time normally at financial year-end. It is also called “Statement of Financial Position”.

Income Statement: Income statement represents the schedule of incomes and expenses of the current accounting period. It is also called “Statement of Comprehensive Income”.

Cash Flow Statement: Cash flow statement shows the breakup of cash inflows and outflows during an accounting period. It is also called “Statement of Cash Flows”.

Statement of Changes in Equity: This represents the changes occurred in the equity section of the business.

Importance Of Financial Statements

As discussed earlier the financial statements are used for taking important financial decisions by its users, so it is important that the financial statements give a true and fair view of the financial affairs of the company.

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