Financial Statements

A set of financial statements is a structured representation of the financial performance and financial position of a business and how its financial position changed over time. It is the ultimate output of an accounting information system and has following six components:

  1. Income Statement
  2. Balance Sheet
  3. Statement of Cash Flows
  4. Statement of Changes in Equity
  5. Notes and Other Disclosures

Financial statements are better understood in context of all other components of the financial statements. For example a balance sheet will communicate more information if we have the related income statement and the statement of cash flows too.

Following the time-period principle, financial statements are prepared after a specified period; say a quarter, year, etc.

Interim Financial Statements

Quarterly and semiannual financial statements are called interim financial statements and are normally prepared in a condensed form. It means that the disclosures required in them are far less than those required in annual financial statements. Quarterly financial statements are normally unaudited but semiannual reports need to be at least reviewed by an auditor who is a qualified professional accountant authorized to attest the authenticity of financial statements.

Annual Financial Statements

Financial statements prepared for a period of one year are called annual financial statements and are required to be audited by an auditor (a chartered accountant or a certified public accountant). Annual financial statements are normally published in an annual report which also includes a directors' report (also called management discussion and analysis) and an overview of the company, its operations and past performance.

Income statement communicates the company's financial performance over the period while a balance sheet communicates the company's financial position at a point of time. The statement of cash flows and the statement of changes in equity tells us about how the financial position changed over the period. Disclosure notes to financial statements cover such material information which is not appropriate to be communicated on the face of the main financial statements.

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork