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Know why we need a financial statement

What is the financial statement?

A financial statement is a collection of documents and reports which accounts for the financial status and activities of an individual or a business. It shows where the money is from, where it went and where it is now.

The financial statement consists of:

  • Balance sheet –Shows the company’s financial status at the end of a specified date and the company’s assets, liabilities, and shareholder’s equity.
  • Income statement –Shows the revenues, expenses, and profits of a company over a specific time period.
  • Cash-flow statement –Shows the company’s cash inflow and outflow during a period of time.

The purpose

The general purpose of the entire set of the financial statement is:

  • To determine the ability of a business to generate cash and business transactions such as the sources and expenses.
  • To determine the business’s capability to pay back debts.
  • To determine the trends in the financial results of company operations.
  • To evaluate financial ratios from the statements to understand business performance.

The financial statement provides important details of a company’s financial position, profitability and activities (involving its finance, operation, investment). The shareholders, investors, banks or vendors use it to analyze a company for the following purpose:

  • Investors –To decide whether to invest and to determine the price per share to invest.
  • Lenders –To determine whether to loan to a business or restrict the amount already loaded.
  • Government entities –To tax the business.
  • Acquirer –To determine the price to offer to buy the business.