Purpose of Financial Statements
The purpose of financial statements is investment analysis using the financial position (Balance Sheet), profitability (Income Statement) and operating, investing, and financing activities (Cash Flow Statement) of a company.
Financial statements are used by shareholders, executives, employees, investors, potential lenders such as banks or vendors, and any other person or institution that needs to analyze a company.
Company Financial Statements
The Balance Sheet displays a snapshot of assets, liabilities, and net worth (book value) of a company at a specific point in time (i.e. Dec. 31, 2011). It is the best accounting statement for analyzing the financial position of an individual or company.
The Income Statement provides the revenues, expenses, and profits (or losses) of an entity over a specific period of time (usually quarterly or annually).
The Cash Flow Statement shows where an entity’s cash is coming from and where it is going to. This statement separates the cash flow from operations, investing, and financing activities in a consolidated statement.
Company Financial Analysis
No one statement provides sufficient information for company financial analysis. But by putting together the three financial statements, the analyst has the information needed to understand the financial position, profitability, and operating, investing, and financing activities of a company.
All three company financial statements are connected. The profit or loss from the income statement will be reflected in the assets and liabilities of the balance sheet. Changes in cash flow will be displayed in both the balance sheet and income statement and vice versa.
Understanding the purpose of company financial statements, and how each of the three relates to one another, provides important information for company financial analysis.
Related Reading: What is the Big Deal about Intrinsic Value?