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Simple English definitions for legal terms
financial statements
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A quick definition of financial statements:
Financial statements are reports that show how much money a business has and how much it has spent during a certain time period, usually a year. There are three main reports in financial statements: the balance sheet, income statement, and cash flow statement. These reports help people understand how well a business is doing financially. Big companies may also have extra notes and get checked by an outside person to make sure everything is correct. Financial statements follow rules called Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
A more thorough explanation:
Financial statements are reports that provide information about the financial position and performance of a business during a specific period, usually a year. They summarize financial and accounting information and help investors, creditors, and other stakeholders make informed decisions about the company.
The three main types of financial statements are:
- Balance Sheet: This statement shows the company's assets, liabilities, and equity at a specific point in time. It provides a snapshot of the company's financial position.
- Income Statement: This statement shows the company's revenues, expenses, and net income or loss over a specific period. It provides a summary of the company's financial performance.
- Cash Flow Statement: This statement shows the company's cash inflows and outflows over a specific period. It provides information about the company's liquidity and ability to meet its financial obligations.
Financial statements may also include a statement of changes in equity, which shows how the company's equity has changed over a specific period.
Financial statements are important because they provide valuable information to investors, creditors, and other stakeholders. They help these parties make informed decisions about the company, such as whether to invest in it or extend credit to it.
For example, if a company's income statement shows that it has been consistently profitable over the past few years, investors may be more likely to invest in the company. On the other hand, if a company's balance sheet shows that it has a large amount of debt, creditors may be hesitant to extend credit to the company.
Financial statements are also important for regulatory purposes. Publicly traded companies are required to file financial statements with the Securities and Exchange Commission (SEC) on a regular basis. These statements must be prepared in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
Financial statements are essential tools for understanding a company's financial position and performance. They provide valuable information to investors, creditors, and other stakeholders, and help ensure transparency and accountability in the business world.