About Financial Statements

A financial statement is a resume of a business' financial activities. It is a report that accountants use to aide the leaders of a business in making key decisions surrounding money. As a result, understanding each segment of a financial statement is vital. A positive or negative one can make or break a company.

Features

Four key elements are a part of every financial statement. These elements are a balance sheet, income statement, statement of retained earnings and a statement of cash flows. A balance sheet (or statement of financial condition) reports a business' net equity, assets and liabilities. An income statement (or profit and loss statement) states a business' expenses, profits and income over a specific period of time. A statement of retained earnings documents the fluctuations in a business' retained earnings over a specific period. Statement of cash flows states a business' operating, investing and financial cash flow. All of these elements of a financial statement are used to judge the financial activities of a business.

Function

The function of a financial statement is to reflect the financial weakness or strength of a business. Internally, it is used by a business to make financial decisions such as the hiring of new employees or layoffs. Externally, financial statements are used by investors to see whether a company is a viable, financial risk. Investors naturally keep away from companies with weak financial statements. Overall, financial statements help direct any activity linked to money that a business conducts.

Risk Factors

One main risk factor is associated with the use of financial statements. It is the over-reliance on them. Financial statements are a tool to be used in order to help a business succeed. However, they are not the only way to see how a business is doing and will do in the future. For example, the financial statements of the business that invented the "pet rock" probably looked good the year before consumers suddenly lost interest in it. So with products that are fads, leaders in a business must consider other things like marketing studies in order to predict the strength and future of their finances.

Misconceptions

Misconceptions regarding financial statements are that only one element of it is important. Some people think that the statement of cash flow is the bottom line of this type of report. However, all of the elements of a report work together to give a clear picture of a business' financial strength. For this reason, they all must be used together in making important financial decisions.

Benefits

The benefits of financial statements are many. However, the main one is that these reports give accountants and leaders in business a tangible piece of information about their finances. It lays out how much money is coming in and going out. As a result, a head of a business can use it to lead his company toward success.

Resources

• Beginner's Guide to Financial Statements