A financial statement is the combination of the three major reports on a business. It will contain the cash flow statement, the income statement and the balance sheet of the business. All three together produce an overall picture of the health of the business.
Why is a financial statement important?
The answer to this question is in the definition; it is the complete report on the health of the business taking in cash flow, income and the balance sheet. The financial statement determines if a business has to ability to repay loans, if it has the cash flow to meet bills and purchase stock. It will also tell from where the business is generating cash and where the cash goes.
The financial statement tells if the business is profitable, if it will stay profitable and if there are any large problems looming, such as a continuous drop in sales over time. Reading the financial statement will give an overall view of the condition of the business and if there are any warnings signs of possible future problems.
A bank or other such institution will look to the financial statement as the first indicator of how the business is performing and if there is a need for further investigation.
When will a company prepare a financial statement?
Every business will ready a financial statement to go with their end of year results, to give interested parties the overview of how the business is functioning. If a business is looking to increase credit facilities with a bank or trying to raise capital for an expansion, it will produce a financial statement for the end of a fiscal quarter or the most recent month.
When preparing a financial statement for such purposes the best practice is to use general accountancy language, understood by all parties. A financial statement that may accompany an end of year report and read just by employees, is often in terms familiar to just those involved.
Often a government body may request a financial statement for tax purposes and the company will need to produce one of high quality using generally accepted guidelines. A bank or investors may also request a financial statement without warning, if they are concerned about the profitability or otherwise of the company. For these reason alone it is vital for any business to keep good and current records so that a financial statement is easy and quick to produce.
Financial Statement FAQ
What is a financial statement simple definition?
What are the 4 types of financial statements?
- Balance Sheet: A statement of a company's financial position at a particular point in time, showing assets, liabilities, and net worth.
- Income Statement: A statement of a company's financial performance over a period of time, showing revenue, expenses, gains, and losses.
- Cash Flow Statement: A statement of a company's inflows and outflows of cash from operations, investments, and financing activities over a period of time.
- Statement of Stockholders' Equity: A statement of the changes in a company's stockholders' equity over a period of time, showing contributions, distributions, and other changes.