What Are Financial Statements?
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are frequently inspected by government agencies, accountants, firms, and so on to guarantee exactness and for tax, financing, or investing purposes. Financial statements incorporate the
- Balance sheet
- Income statement
- Cash flow statement
Grasping Financial Statements
Investors and financial analysts depend on financial data to investigate the performance of a company and make forecasts about the future bearing of the company's stock price. One of the main resources of dependable and examined financial data is the annual report, which contains the association's financial statements.
The financial statements are used by investors, market analysts, and creditors to assess a company's financial wellbeing and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.
The balance sheet gives an outline of a company's assets, liabilities, and stockholders' equity as a snapshot in time. The date at the highest point of the balance sheet lets you know when the snapshot was taken, which is generally the finish of the reporting period. Below is a breakdown of the things in a balance sheet.
- Endlessly cash equivalents are fluid assets, which might incorporate Treasury bills and authentications of deposit.
- Accounts receivables are the amount of money owed to the company by its customers for the sale of its product and service.
- Shareholders' equity is a company's total assets minus its total liabilities. Shareholders' equity represents the amount of money that would be returned to shareholders assuming the assets were all liquidated and the company's all's debt was paid off.
- Retained earnings are part of shareholders' equity and are the amount of net earnings that were not paid to shareholders as dividends.
Illustration of a Balance Sheet
Below is a portion of ExxonMobil Corporation's (XOM) balance sheet for monetary year 2021, reported as of Dec. 31, 2021.
- Total assets were $338.9 billion.
- Total liabilities were $163.2 billion.
- Total equity was $175.7 billion.
- Total liabilities and equity were $338.9 billion, which equals the total assets for the period.
Not at all like the balance sheet, the income statement covers a scope of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement gives an outline of revenues, expenses, net income, and earnings per share.
Operating revenue is the revenue earned by selling a company's products or services. The operating revenue for a vehicle manufacturer would be realized through the production and sale of autos. Operating revenue is created from the core business activities of a company.
Non-operating revenue is the income earned from non-core business activities. These revenues fall outside the primary function of the business. Some non-operating revenue models include:
- Interest earned on cash in the bank
- Rental income from a property
- Income from strategic partnerships like sovereignty payment receipts
- Income from an advertisement display situated on the company's property
Other income is the revenue earned from different activities. Other income could incorporate gains from the sale of long-term assets like land, vehicles, or a subsidiary.
Primary expenses are incurred during the method involved with earning revenue from the primary activity of the business. Expenses incorporate the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D).
Run of the mill expenses incorporate employee wages, sales commissions, and utilities like power and transportation.
Expenses that are linked to secondary activities incorporate interest paid on loans or debt. Losses from the sale of an asset are additionally recorded as expenses.
The primary purpose of the income statement is to convey subtleties of profitability and the financial consequences of business activities; nonetheless, it tends to be exceptionally effective in showing whether sales or revenue is expanding when compared over different periods.
Investors can likewise see how well a company's management is controlling expenses to determine whether a company's efforts in decreasing the cost of sales could support profits over the long haul.
Illustration of an Income Statement
Below is a portion of ExxonMobil Corporation's income statement for financial year 2021, reported as of Dec. 31, 2021.
- Total revenue was $276.7 billion.
- Total costs were $254.4 billion.
- Net income or profit was $23 billion.
Cash Flow Statement
The cash flow statement (CFS) measures how well a company creates cash to pay its debt obligations, fund its operating expenses, and fund investments. The cash flow statement supplements the balance sheet and income statement.
The CFS permits investors to comprehend how a company's operations are running, where its money is coming from, and how money is being spent. The CFS likewise gives knowledge regarding whether a company is on a strong financial balance.
There is no formula, essentially, for working out a cash flow statement. All things considered, it contains three sections that report cash flow for the different activities for which a company uses its cash. Those three parts of the CFS are listed below.
The operating activities on the CFS incorporate any sources and uses of cash from running the business and selling its products or services. Cash from operations incorporates any changes made in cash, accounts receivable, depreciation, inventory, and accounts payable. These transactions likewise incorporate wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.
Investing activities incorporate any sources and uses of cash from a company's investments into the long-term eventual fate of the company. A purchase or sale of an asset, loans made to sellers or received from customers, or any payments connected with a merger or acquisition is remembered for this category.
Likewise, purchases of fixed assets like property, plant, and equipment (PPE) are remembered for this section. In short, changes in equipment, assets, or investments connect with cash from investing.
Cash from financing activities incorporates the wellsprings of cash from investors or banks, as well as the uses of cash paid to shareholders. Financing activities incorporate debt issuance, equity issuance, stock repurchases, loans, dividends paid, and repayments of debt.
The cash flow statement accommodates the income statement with the balance sheet in three major business activities.
Illustration of a Cash Flow Statement
Below is a portion of ExxonMobil Corporation's cash flow statement for financial year 2021, reported as of Dec. 31, 2021. We can see the three areas of the cash flow statement and their outcomes.
- Operating activities created a positive cash flow of $48 billion.
- Investing activities created negative cash flow or cash outflows of - $10.2 billion for the period. Augmentations to property, plant, and equipment made up the majority of cash outflows, and that means the company invested in new fixed assets.
- Financing activities produced negative cash flow or cash outflows of - $35.4 billion for the period. Reductions in short-term debt and dividends paid out made up the majority of the cash outflows.
Limitations of Financial Statements
Albeit financial statements give a wealth of data on a company, they truly do have limitations. The statements are not entirely clear, and subsequently, investors frequently draw tremendously different decisions about a company's financial performance.
For instance, a few investors could need stock repurchases while different investors could like to see that money invested in long-term assets. A company's debt level may be fine for one investor while another could have worries about the level of debt for the company.
While dissecting financial statements, it's important to compare numerous periods to determine on the off chance that there are any trends as well as compare the company's outcomes to its friends in a similar industry.
- The balance sheet gives an outline of assets, liabilities, and stockholders' equity as a snapshot in time.
- Financial statements are written records that convey the business activities and the financial performance of a company.
- The income statement basically focuses on a company's revenues and expenses during a particular period. Whenever expenses are deducted from revenues, the statement delivers a company's profit figure called net income.
- The cash flow statement (CFS) measures how well a company produces cash to pay its debt obligations, fund its operating expenses, and fund investments.
What Are the 3 Most Important Financial Statements?
The three most important financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues and costs, as well as its cash flows from operating, investing, and financing activities.
What Are the Main Items Shown in Financial Statements?
Contingent upon the corporation, the details in a financial statement will vary; notwithstanding, the most common details are revenues, costs of goods sold, taxes, cash, marketable securities, inventory, short-term debt, long-term debt, accounts receivable, accounts payable, and cash flows from investing, operating, and financing activities.
What Are the Benefits of Financial Statements?
Financial statements show how a business works. It gives understanding into how much and how a business produces revenues, what the cost of carrying on with work is, the manner by which productively it deals with its cash, and what its assets and liabilities are. Financial statements give all the detail on how well or inadequately a company oversees itself.