What are financial statements?
Financial statements turn thousands of transactions into a few standardised reports that owners, lenders, investors and tax authorities can understand. They are prepared under a framework such as IFRS, IFRS for SMEs or US GAAP.
The main statements
- [Income statement](/glossary/income-statement): revenue, expenses and profit for a period.
- [Balance sheet](/glossary/balance-sheet): assets, liabilities and equity at a date.
- [Cash flow statement](/glossary/cash-flow-statement): cash in and out from operating, investing and financing activities.
- Statement of changes in [equity](/glossary/equity): how owners' equity moved during the period.
- Notes: accounting policies, breakdowns and disclosures.
How they connect
Net income from the income statement flows into [retained earnings](/glossary/retained-earnings) in equity. The change in cash on the balance sheet is explained by the cash flow statement.
Who uses them
- Owners and managers, to make decisions
- Banks, to assess creditworthiness
- Investors, to value the business
- Tax authorities, to assess tax
- Regulators and company registries
Frequency
Annual statements are usually required by law. Many businesses also prepare monthly or quarterly management accounts. Larger companies may need an independent audit.