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What are 'Financial Statements'

Financial statements are written records that convey the financial activities and conditions of a business or entity and consist of four major components. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include income statements, balance sheets, statements of retained earnings and cash flows but may also require additional detailed disclosures depending on the relevant accounting framework. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing or investing purposes.

BREAKING DOWN 'Financial Statements'

Financial analysts rely on data to analyze the performance of, and make predictions about, the future direction of a company's stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm's financial statements. The three major financial statement reports are the income statement, balance sheet and statement of cash flows.

Balance Sheet

The balance sheet provides an overview of assets, liabilities and stockholders' equity as a snapshot in time. The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the fiscal year. The balance sheet equation, otherwise known as the accounting equation, can be expressed as Assets = Liabilities + Stockholders' Equity,

The balance sheet identifies how assets are funded, either with liabilities, such as debt, or stockholders' equity, such as retained earnings and additional paid-in capital. Assets are listed on the balance sheet in order of liquidity. Liabilities are listed in the order in which they will be paid. Short-term or current liabilities are expected to be paid within the year, while long-term or noncurrent liabilities are debts expected to be paid in over one year.

Income Statement

Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement provides an overview of revenues, expenses, net income and earnings per share. It usually provides two to three years of data for comparison.

Cash Flow Statement

The cash flow statement merges the balance sheet and the income statement. Due to accounting convention, net income can fall out of alignment with cash flow. The cash flow statement reconciles the income statement with the balance sheet in three major business activities. These activities include operating, investing and financing activities. Operating activities include cash flows made from regular business operations. Investing activities include cash flows from the acquisition and disposition of assets, such as real estate and equipment. Financing activities include cash flows from debt and equity investment capital.

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