Financial statements are reports a company puts together to measure how it’s doing.
Companies create their financial statements by condensing large amounts of data into reports. They offer perspective on where a company’s money comes from, how it’s being spent, and whether the company is in good financial health.
Financial statements may be put together by:
A company typically puts together three main statements:
|Balance sheet||What the company owns and what it owes at a particular point in time.||Can show whether the company has the resources to meet its obligations.|
|Income statement, or “profit and loss”||Sales, expenses, and profits over a specific period of time, such as one year.||Trends in profits are hugely important to outside investors and to the company itself.|
|Statement of cash flows||Cash coming in and cash going out over a specific period of time.||Profits and cash measure different things, but both are important. For example, the cash flow statement shows if customers are paying their bills.|
“I call it the Rule of Three. If you read a company’s financial statements three times, and you still can’t figure out how they make their money, that’s usually for a reason.“
Financial statements are useful for the company itself because they can show:
Outside investors, regulators, and other users also use financial statements to:
When looking at a company’s financial statements, there are a few things to keep in mind:
Financial statements are formal reports that a company puts together on its business performance. The main financial statements businesses produce are the balance sheet, income statement, and statement of cash flows. Investors, regulators, and others may use financial statements when deciding whether to invest, when scrutinizing a company for potential wrongdoing, or for other reasons.