What is financial statements?

We explain what the financial statements are and what are the functions of these reports. In addition, some of its main features.

1. What is financial statements?

Financial statements are reports and documents with economic information , of an individual or entity. Also known by the name of financial statements , these reports expose the economic situation in which a company is , as well as its variations and evolutions that suffer during a certain period of time .

The financial statements are usually useful for the entity’s administrative group , analysts and third parties that fulfill an investment role with it (shareholders, owners).

In different countries the concept of financial statements takes another name:

• In Argentina they are known as balance sheet.
• In Colombia, some financial statements are called Financial Balance.
• In Spain they receive a completely different name, Annual Accounts .

2. Statement of equity or balance sheet

This is a financial report that highlights the economic situation of an entity at a specific time in its life . This element is made up of three widely used concepts within the financial statements: the asset, the liability and the net worth:

• The asset : It is made up of the economic assets of a company, documents with date of work and all kinds of expenditures that provide a future benefit to said company; In an accounting balance the asset is within the credit.
• The liability : Is any debt or commitment that a company acquires for its own financing or for third parties; In a balance sheet the liability is within the debit.
• Net worth : The PN is the residual resources of the asset, after deducting the liability. The net worth is then calculated using the following equation:

Assets – Liabilities = Net Equity

3. Income statement or profit and loss statement

Here it is reflected how it was that the result of each exercise was achieved in a specific time in an orderly and detailed way.

This document is of vital importance for each company and its realization consists in obtaining the expenses and income of specific and separate categories , so that results can be obtained. The result varies if it was achieved before or after taxes.

4. Evolution of the Net Equity

This accounting statement is one that provides information of vital importance with respect to the size or amount of the Net Equity that a company owns and its different variations or changes over time. These variations or changes are consequences of different actions:

• Transactions made with the owners, third parties or shareholders.
• The surplus achieved or also positive gains that increase the net worth of a company.
• The deficit or losses that cause an abrupt decrease in the net assets of a company

5. Cash flow statement

This accounting statement is present in all companies and is intended to inform the various variations, modifications and movements of cash .

The usefulness of the information provided by this accounting statement is to show managers the ability of the company to generate cash or equivalents. The decision making by the users is totally related to the results offered by this accounting statement.