Define Financial Statements in Simple Terms
A financial statement is a written record of the activities and financial performance of a company during a set period.
For tax and investment purposes they are often audited by government agencies.
While financial statements can come in many forms, there are three that all publicly traded companies are required to produce.
- Balance Sheet
A balance sheet provides an overview of a company’s assets, liabilities, and shareholder equity at a given point in time.It is essentially a financial snapshot of business performance stating how much a company owns (its assets), how much it owes (its liabilities) and how much equity shareholders have in the company.
- Income Statement
The income statement, also known as a profit and loss statement, primarily provides data on the revenue, expenses, gains, and losses a company incurs during a period of time.
- Cash Flow Statement
A cash flow statement, also called a statement of cash flows, states how much cas is coming in and leaving the company.It is a measurement of a company’s overall ability to generate revenue and how well it is able to pay its debts and fund investments and operating expenses.
Use of Financial Statements
These three documents are the primary source of information used by investors when evaluating a company’s investment worthiness.
In addition to these three statements, many companies also file an annual report with the IRS, which some investors like to see as well.
While financial statements are informative, interpreting them for investment decisions is subjective.
For example, some investors have different amounts of debt they are comfortable seeing on a company’s balance sheet.
Other investors might prefer to see a company investing in stock repurchases, while still others might rather see an investment in long-term assets.
Financial Statement Definition FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.