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Financial statements

2007 Schools Wikipedia Selection. Related subjects: Business

   Corporate finance

   Working capital management
   Cash conversion cycle
   Return on capital
   Economic value added
   Just In Time (business)
   Economic order quantity
   Discounts and allowances
   Factoring (finance)

   Capital budgeting
   Capital investment decisions
   The investment decision
   The financing decision
   Capital investment decisions

   Sections
   Managerial finance
   Management accounting
   Mergers and acquisitions
   Balance sheet analysis
   Business plan
   Corporate action
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   Finance series
   Financial market
   Financial market participants
   Corporate finance
   Personal finance
   Public finance
   Banks and Banking
   Financial regulation
   v d e
   Historical financial statement
   Historical financial statement

   Financial statements (or financial reports) are formal records of a
   business' financial activities. These statements provide an overview of
   a business' profitability and financial condition in both short and
   long term. There are four basic financial statements:

   1. Balance Sheet - also referred to as statement of financial
   condition, reports on a company's assets, liabilities and net equity as
   of a given point in time.
   2. Income Statement - also referred to as Profit or loss statement,
   reports on a company's results of operations over a period of time.
   3. Cash Flow Statement - reports on a company's cash flow activities,
   particularly its operating, investing and financing activities.
   4. Statement of Retained Earnings - explains the changes in a company's
   retained earnings over the reporting period.

   Because these statements are often complex, an extensive set of Notes
   to the Financial Statements and management discussion and analysis is
   usually included. The notes will typically describe each item on the
   Balance sheet, Income statement and Cash flow statement in further
   details. Notes to Financial Statements are considered an integral part
   of the Financial Statements.

Analogy

   Knowing is not the same as understanding, so it is helpful to present
   an analogy.
     * Think of an investment as a water reservoir. The value of the
       investment is the volume of water in it. The shareholder equity
       (net equity) on the balance sheet measures this value.
     * Streams empty into the reservoir, adding more water. These inflows
       are measured by Revenues on the Income statement.
     * Streams run out of the reservoir, depleting it. These outflows are
       measured by Expenses on the Income statement.
          + The difference between these inflows and outflows is the net
            income, also shown in the Income statement.

     * When a neighbour joins in the investment as a partner, he digs a
       canal from his own reservoir so it drains into the reservoir. This
       additional water is measured by an increase in the share capital.
     * If you ask a neighbour to add to the reservoir, it is considered as
       liability, thus reducing net equity but increasing assets. These
       are both shown on the Balance Sheet.

   While measuring the volume of water in the reservoir at a point in time
   (balance sheet) is relatively easy, keeping track of the streams'
   volumes at every second of the year is difficult. Accountants may
   choose to ignore some streams: they may not know that some streams
   exist: water may be evaporating, and unmeasurable. As a result the
   income statement is easily wrong. Regardless, the net sum of inflows
   less outflows should equal the difference in the reservoir (beginning
   vs. ending). The statement of changes in shareholder equity attempts
   this reconciliation.

   None of the financial statements measures your own personal share of
   the reservoir when you have partners. It is up to the individual
   investor to measure, not the business totals, but his share. The
   methods to use 'equity per share' is shown at shareholders' equity.

Users of Financial Statements

   Financial statements are used by a diverse group of parties, both
   inside and outside a business. Generally, these users are:

   1. Internal Users: are owners, managers, employees and other parties
   who are directly connected with a company.
     * Owners and managers require financial statements to make important
       business decisions that affect its continued operations. Financial
       analysis are then performed on these statements to provide
       management with a more detailed understanding of the figures. These
       statements are also used as part of management's report to its
       stockholders, as it form part of its Annual Report.

     * Employees also need these reports in making collective bargaining
       agreements (CBA) with the management, in the case of labor unions
       or for individuals in discussing their compensation, promotion and
       rankings.

   2. External Users: are potential investors, banks, government agencies
   and other parties who are outside the business but need financial
   information about the business for a diverse number of reasons.
     * Prospective investors make use of financial statements to assess
       the viability of investing in a business. Financial analysis are
       often used by investors and is prepared by professionals (Financial
       Analysts), thus providing them with the basis in making investment
       decisions.

     * Financial institutions (banks and other lending companies) use them
       to decide whether to grant a company with fresh working capital or
       extend debt securities (such as a long-term bank loan or
       debentures) to finance expansion and other significant
       expenditures.

     * Government entities (Tax Authorities) need financial statements to
       ascertain the propriety and accuracy of taxes and other duties
       declared and paid by a company.

     * Media and the general public are also interested in financial
       statements for a variety of reasons.

Government financial statements

   The rules for the recording, measurement and presentation of government
   financial statements may be different from those required for business
   and even for non-profit organizations. They may use either accrual
   accounting, or cash accounting, or a combination of the two. A complete
   set of Chart of Accounts is also used that is substantially different
   from the Chart of a profit-oriented business.

Audit and Legal Implications

   Although the legal statutes may differ from country to country, an
   audit of financial statements are usually, but not exclusively required
   for investment, financing, and tax purposes. These are usually
   performed by independent accountants or auditing firms. Results of the
   audit are summarized in an audit report that either provide an
   unqualified opinion on the financial statements or qualifications as to
   its fairness and accuracy. The audit opinion on the financial
   statements is usually included in the Annual Report.

   There has been much legal debate over who an auditor is liable to.
   Since audit reports tend to be addressed to the current shareholders,
   it is commonly thought that they owe a legal duty of care to them. But
   this may not be the case as determined by common law precedent. In
   Canada, auditors are liable only to investors using a prospectus to buy
   shares in the primary market. In the UK, they have been held liable to
   potential investors when the auditor was aware of the potential
   investor and how they would use the information in the financial
   statements. Nowadays auditors tend to include in their report liability
   restricting language, discouraging anyone other than the addressees of
   their report from relying on it. Liability is an important issue: in
   the UK, for example, auditors have unlimited liability.

   In the United States, especially in the post- Enron era there has been
   substantial concern about the accuracy of financial statements.
   Corporate officers (the CEO and CFO) are personally liable for
   attesting that financial statements "do not contain any untrue
   statement of a material fact or omit to state a material fact necessary
   to make the statements made, in light of the circumstances under which
   such statements were made, not misleading with respect to the period
   covered by th[e] report". Making or certifying misleading financial
   statements exposes the people involved to substantial civil and
   criminal liability. For example Bernie Ebbers (former CEO of WorldCom)
   was sentenced to 25 years in federal prison for allowing WorldCom's
   revenues to be overstated by $11 billion over five years.

Standards and Regulations

   Different countries have developed their own accounting principles over
   time, making international comparisons of companies difficult. To
   ensure uniformity and comparability between financial statements
   prepared by different companies, a set of guidelines and rules are
   used. Commonly referred to as Generally Accepted Accounting Principles
   (GAAP), these set of guidelines provide the basis in the preparation of
   financial statements.

   Recently there has been a push towards standardizing accounting rules
   made by the International Accounting Standards Board ("IASB"). IASB
   develops International Financial Reporting Standards that have been
   adopted by Australia, Canada and the European Union (for publicly
   quoted companies only), are under consideration in South Africa and
   other countries. The United States Federal Accounting Standards Board
   has made a commitment to converge the US GAAP and IFRS over time.

Inclusion in Annual Reports

   To entice new investors, most public companies assemble their financial
   statements on fine paper with pleasing graphics and photos in an annual
   report to shareholders, attempting to capture the excitement and
   culture of the organization in a "marketing brochure" of sorts. Usually
   the company's chief executive will write a letter to shareholders,
   describing management's performance and the company's financial
   highlights.

   In the United States, prior to the advent of the internet, the annual
   report is considered the most effective way for corporations to
   communicate with individual shareholders. Blue chip companies went to
   great expense to produce and mail out attractive annual reports to
   every shareholder. The annual report was often prepared in the style of
   a coffee table book.

History

   Financial statements and records have been produced for as far back as
   there has been human writing. The people in the old Mesopotamian
   societies operated both insurance and credit (see interest)
   corporations, and had the obvious need of record keeping.

   Retrieved from " http://en.wikipedia.org/wiki/Financial_statements"
   This reference article is mainly selected from the English Wikipedia
   with only minor checks and changes (see www.wikipedia.org for details
   of authors and sources) and is available under the GNU Free
   Documentation License. See also our Disclaimer.
