Legal Definitions - financial statement

A financial statement is a formal record that summarizes an individual's or an organization's financial activities and position. It provides a clear picture of financial health at a specific point in time or over a defined period, detailing what is owned (assets), what is owed (liabilities), and how money has been earned and spent (income and expenses). These statements are crucial tools for understanding an entity's economic performance and standing.

There are also specific types of financial statements:

• A certified financial statement is one that has been reviewed and verified by an independent accounting professional, such as a Certified Public Accountant (CPA), to ensure its accuracy and compliance with established accounting standards.
• A consolidated financial statement combines the financial information of a parent company and all its subsidiary companies into a single, unified report, presenting them as one economic entity.

Here are some examples of how financial statements are used:

• Applying for a Business Loan: A small bakery owner wants to expand their business and needs a loan from a bank to purchase new equipment. The bank will require the bakery's financial statements, including an income statement (showing sales, costs, and profits over the past year) and a balance sheet (listing assets like ovens and cash, and liabilities like existing loans). These documents allow the bank to assess the bakery's profitability, solvency, and ability to repay the new loan.

  This illustrates how financial statements provide critical data for lenders to evaluate the financial health and creditworthiness of a business seeking funding.

• Personal Financial Planning: An individual is planning for retirement and wants to understand their current net worth and cash flow. They might compile a personal financial statement, which includes a balance sheet detailing their assets (e.g., savings, investments, home equity) and liabilities (e.g., mortgage, credit card debt), and an income and expense statement showing their monthly earnings and spending. This helps them track progress towards financial goals and make informed decisions about saving and investing.

  This illustrates how financial statements can be used by individuals to manage their personal finances, assess their wealth, and plan for future life events.

• Public Company Reporting: A large technology company listed on the stock exchange is legally required to publish its financial statements quarterly and annually. These reports, which include a balance sheet, income statement, and statement of cash flows, are made available to shareholders, potential investors, and the public. They provide transparency into the company's performance, allowing investors to analyze its profitability, financial stability, and growth prospects before making investment decisions.

  This illustrates how financial statements are essential for public companies to comply with regulations, maintain transparency, and provide crucial information to the investment community.