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.
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They typically include four basic financial statements accompanied by a management discussion and analysis:
- A balance sheet or statement of financial position, reports on a company’s assets, liabilities, and owners equity at a given point in time.
- An income statement – or profit and loss report or statement of comprehensive income, or statement of revenue & expense—reports on a company’s income, expenses, and profits over a stated period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the stated period.
- A statement of changes in equity or equity statement, or statement of retained earnings, reports on the changes in equity of the company over a stated period of time.
- A cash flow statement reports on a company’s cash flow activities, particularly its operating, investing and financing activities over a stated period of time.
(Notably, a balance sheet represents a single point in time, where the income statement, the statement of changes in equity, and the cash flow statement each represent activities over a stated period of time.)
For large corporations, these statements may be complex and may include an extensive set of footnotes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.