Join Rudolph Rosenberg for an in-depth discussion in this video What is a financial statement?, part of Financial Literacy: Reading Financial Reports.
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- [Voiceover] So what is a financial statement? It's not actually one document but rather four documents. The primary purpose of those documents is to summarize the financial information of the company and comply with the law by providing an honest and transparent view of the financial situation and performance of the company. As a company is a complex thing to summarize it cannot be done on a single document and this is why four documents are needed. The balance sheet, the income statement, the cash flow statement, and the statement of changes in equity.
Those four documents serve the objective of looking at the finances of the company from four different angles to give the reader a complete and well-rounded view of the financial situation and performance of the company. It is also a means of facilitating the exchanges between all the stakeholders by providing a common framework to report vital information about the company. The balance sheet summarizes what the company owns, such as the value of its properties, machinery, or any other assets, and what he owes, or in other words, any liability it has to third parties, such as loans from the bank, for example.
The income statement, which is also commonly called the P&L for profit and loss, summarizes the financial performance of the company, covering sales, expenditures, and ultimately the profitability of the company. The cash flow statement serves a different purpose, focusing on cash solely and therefore very short-term focus. It records how cash enters and exits the bank account. As we will see further on, cash management is what makes or breaks a company. It therefore deserves its own document.
The last document is the statement of changes in equity, which records changes in company ownership between shareholders. This document is important but not key to understanding financial performance. We will therefore not discuss it further. At this point it is sufficient for you to know that it exists. A very important point to note is that financial statements focus on the past performance of the company. Sometimes companies can decide to add comments or documents that offer an opinion on future trends or performance.
Those documents are added to the financial statement but core financial statement documents find their source solely in past activity and report what has already happened.
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- What is a financial statement?
- Reading the balance sheet
- Understanding depreciation, liabilities, and equity
- Reading the income statement
- Understanding revenue, costs, profitability, and net income
- How cash flow works
- Analyzing financial documents with context<br><br>
- The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.