Financial reporting is the method a firm uses to convey its financial performance to the market, its investors, and other stakeholders. The objective of financial reporting is to provide information on the changes in a firm's performance and financial position that can be used to make financial and operating decisions. In addition to being a management aid, this information is used by analysts to forecast the firm's ability to produce future earnings and as a means to assess the firm's intrinsic value. Other stakeholders, such as creditors, will use financial statements as a way to evaluate the company's economic and competitive strength.

The timing and the methodology used to record revenues and expenses may also impact the analysis and comparability of financial statements across companies. Financial statements are prepared in most cases on the basis of three basic premises:

1. The company will continue to operate (going-concern assumptions).

2. Revenues are reported as they are earned within the specified accounting period (revenues-recognition principle).

3. Expenses should match generated revenues within the specified accounting period (matching principle).

Furthermore, financial statements are prepared using one of two basic accounting methods:

1. Cash-basis accounting - This method consists of recognizing revenue (income) and expenses when payments are made (when checks are issued) or when cash is received (and deposited in the bank).

2. Accrual accounting - This method consists of recognizing revenue in the accounting period in which it is earned, that is, when the company provides a product or service to a customer, regardless of when the company gets paid. Expenses are recorded when they are incurred instead of when they are paid for.

Financial statements don't fit into a single mold. Many articles and books on financial statement analysis take a one-size-fits-all approach. The less-experienced investor then gets lost when he or she encounters a presentation of accounts that falls outside the so-called "typical" company. Remember that the diverse nature of business activities results in different financial statement presentations.
The balance sheet is particularly likely to be presented differently from company to company; the income and cash flow statements are less susceptible to this phenomenon.

Knowing how to work with the numbers in a company's financial statements is an essential skill. The meaningful interpretation and analysis of balance sheets, income statements and cash flow statements to discern a company's investment qualities is the basis for smart investment choices.

(To learn more, read 12 Things You Need To Know About Financial Statements, our Basic Financial Statement Analysis tutorial and our Advanced Financial Statement Analysis tutorial.)



The Balance Sheet

Related Articles
  1. Investing

    12 Things You Need to Know About Financial Statements

    Discover how to keep score of companies to increase your chances of choosing a winner.
  2. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  3. Investing

    Explaining Financial Statement Analysis

    Financial statement analysis is the process of reviewing a company’s statements to gain an understanding of its financial health.
  4. Investing

    What Is The Difference Between A Cash Flow Statement And An Income Statement?

    A firm’s cash flow statement measures the sources and uses of its cash. The income statement shows how it is financially performing.
  5. Investing

    Navigating Government And Nonprofit Financial Statements

    Learn how to trace where your tax dollars and charitable donations are going.
  6. Investing

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  7. Investing

    Why Financial Statements Are Harder to Read Than Ever Before

    Understand four major reasons that financial statements published in 2016 are more complicated and difficult to read than they were in the past.
Frequently Asked Questions
  1. What is a reasonable amount of debt?

    It really depends on numerous factors - what stage of life you are at, your spending and saving habits, the stability of ...
  2. How are IRA withdrawals taxed?

    Learn how IRA withdrawals are taxed at retirement age and for qualified withdrawals. Consider the different tax consequences ...
  3. How does CareCredit for pets work?

    Understand how using a CareCredit credit card aids pet parents in the payment of potentially high veterinary care costs.
  4. Do 401k contributions reduce AGI and/or MAGI?

    Discover how contributing to a 401(k) plan can reduce your AGI and/or MAGI. Also learn by how much and how this differs from ...
Trading Center