Financial statements are reports that provide information about a company's financial performance and financial position and how it has changed over a period.
When we talk about financial statements, we often mean the general-purpose financial statements, the financial statements which a company prepares under some applicable financial reporting framework (such as IFRS or US GAAP). These are intended primarily for the company's investors and creditors but may address information needs of other stakeholders.
A complete set of financial statements contains the following:
- A statement of profit or loss and other comprehensive income for the period;
- A statement of financial position at the period end (popularly called the balance sheet);
- A statement of cash flows for the period;
- A statement of changes in shareholders equity for the period.
- Notes to the financial statements, containing significant accounting policies, and other explanatory material;
- Comparative statements of financial position, statement of profit or loss and other comprehensive income, statement of changes in shareholders equity and statement of cash flows.
Companies are allowed to prepare either a single statement of profit or loss and other comprehensive income or two statements, one of which is a statement of profit or loss (popularly called the income statement) and the other is a statement of other comprehensive income.
Usefulness of each component of financial statements
Each item of a complete set of financial statements serves its own purpose. For example, income statements are most useful when used together with the current and prior period balance sheets and the statements of cash flows.
A statement of profit or loss (i.e. the income statement) communicates a company's financial performance over a period while a balance sheet communicates the company's financial position at a point of time. The statement of cash flows and the statement of changes in equity tells us about how the financial position changed over the period. Notes to the financial statements cover such material information which is not appropriate to be communicated on the face of the primary financial statements.
Interim and annual financial statements
In accordance with the time-period principle, financial statements are prepared for a specified period; say a quarter, year, etc. Most often the periods are consistent i.e. a company cannot arbitrarily change the duration unless there is a compelling reason.
Depending on the period that they cover, financial statements are either interim or annual.
Interim financial statements
Interim financial statements are those which are prepared for a period shorter than one complete financial year. They are often prepared in a condensed form which means that the disclosures required in these financial statements are far less than those required in the annual financial statements. Quarterly financial statements are normally unaudited but semiannual reports may be required to be reviewed by an auditor who is a qualified professional accountant authorized to attest the financial statements.
Annual financial statements
Financial statements prepared for a period of one year (or 52 weeks) are called annual financial statements and are required to be audited by an auditor (a chartered accountant or a certified public accountant). Annual financial statements are normally published in an annual report which also includes the directors' report (also called the management discussion and analysis) and an overview of the company, its operations and past performance.