Financial statements are a set of documents showing a company’s current financial status. Specifically, these statements indicate:
- How much money is being made and spent—shown on the income statement
- What the company owns and how much it owes—shown on the balance sheet
- Where money came from and where it went—noted in the statement of changes in financial position
- The amount of money kept in the company by the owners—shown on the statement of retained earnings
Entrepreneurs need to know what to look for in financial statements and how to properly analyze them so they can make informed decisions about their business. Many insights are available at a glance while others require deeper analysis.
Financiers and investors read and conduct even deeper analyses to determine whether or not to put more money into a business or take it out.
More about financial statements
To make it easy to analyze and compare results across companies, financial statements are constructed using a set of rules called International Financial Reporting Standards (IFRS). Here are some insights into those rules:
- The rules allow for three basic types of financial statements: Audited, accountant-reviewed and notice-to-reader.
- These financial statements may be prepared on either a cash or accrual basis.
- A cover letter must be included to identify the types of statement prepared.
- Notes to the financial statements must be included to show the assumptions used by the accountants when they were preparing the statements. These also provide additional information to help readers with interpretation and analysis.
The accounting rules can be complicated, especially for companies that do business in other countries, which is why most companies engage professional accountants to prepare their financial statements.
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