Financial Statements: List of Types and How to Read Them

As you can see, the notes to financial statements provides enormous information about how the company manages its business and the practices it follows and an analyst must use such information in his analysis. Since the financial statements provide only a summary of what the company is required to report, it is important for financial analysts to read the disclosures and other supplementary information to know the real story. The cash flow statement reconciles the income statement with the balance sheet in three major business activities.

The primary financial statements provide a summary of the financial position of a firm. These financial statements are accompanied by a series of explanations, found in the footnotes. In the footnotes the company makes several important disclosures about accounting methods, valuation, excluded liabilities, assumptions made and a variety of other important issues. Financial statement footnotes are typically included in the notes to the financial statements section of a company’s annual report. They may also be available on the company’s website or through third-party provider websites such as Edgar Online and Bloomberg.com.

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Footnotes may also include information regarding future activities that are anticipated to have a notable impact on the business or its activities. For example, descriptions of upcoming new product releases may be included, as well as issues about a potential product recall. The Sample shows what is required for fair presentation in conformance with GAAP. An annual report is a publication that public corporations are required to publish annually to shareholders to describe their operational and financial conditions.

They also help the users to assess the performance, financial position, cash flows, and risks of the business, and to make informed decisions and judgments based on the financial statements. Accounting policies and notes also help the business to comply with the accounting standards and regulations, and to avoid errors, misstatements, and disputes. Notes, also known as footnotes, are important in accounting because they provide additional information regarding methodology, valuation, time period and myriad other calculation nuances. Financial statements and reports provide a uniform framework for evaluating sales, net income, cash flow, assets, liabilities and stockholder equity.

Ideally, cash from operating income should routinely exceed net income, because a positive cash flow speaks to a company’s financial stability and ability to grow its operations. However, having positive cash flow doesn’t necessarily mean a company is profitable, which is why you also need to analyze balance sheets and income statements. A management commentary or management’s discussion and analysis report (MD&A) is usually included as a part of public companies’ annual reports. In this section, a company’s management usually discusses matters of concern to the company such as the results of its operations, risk strategies employed, planned capital expenditure, and future outlook.

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Any items within the financial statements that are valuated by estimation are part of the notes if a substantial difference exists between the amount of the estimate previously reported and the actual result. Full disclosure of the effects of the differences between the estimate and actual results should be included. Financial statements are accompanied by financial statement notes and supplementary information that help the users different types and formats of income statement of financial statements to understand the information that is reported. This is done mainly for the sake of clarity because these notes can be quite long, and if they were included in the main text they would cloud the data reported in the financial statement. Using footnotes allows the general flow of a document to remain appropriate by providing a way for the reader to access additional information if they feel it is necessary.

They provide investors, shareholders, and employees with greater insight into a company’s mission and goals, compared to individual financial statements. Consolidation refers to the aggregation of financial statements of a group company as a consolidated whole. In this section of the footnotes, the company confirms that the consolidated financial statements contain the financial information for all its subsidiaries. Any deviations, including deviations from all subsidiaries, also must be explained. Depreciation is spreading the cost of a long-term asset over its useful life (which may be years after the purchase).

While cash flow refers to the cash that’s flowing into and out of a company, profit refers to what remains after all of a company’s expenses have been deducted from its revenues. If you’re new to the world of financial statements, this guide can help you read and understand the information contained in them. Use the notes library to browse, search and add notes to the financial statements. In the United States, prior to the advent of the internet, the annual report was considered the most effective way for corporations to communicate with individual shareholders. Blue chip companies went to great expense to produce and mail out attractive annual reports to every shareholder. Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.

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The Generally Accepted Accounting Principles (GAAP) are used by accountants when deciding how to account for different items while preparing financial statements. The GAAP do not provide strict rules about how different items should be analyzed financially, rather they provide guidelines that accountants must use to apply to their own organizations when creating financial report statements. The notes to the financial statements often contain information about how the accountants applied the GAAP to the financial reports of an organization. Information about accounting policies assists financial readers in better interpreting a company’s financial statements, thus resulting in a more fair presentation of the financial statements.

Notably, a balance sheet represents a single point in time, whereas the income statement, the statement of changes in equity, and the cash flow statement each represent activities over a stated period. The accounting standards (IFRS and US GAAP) afford companies a certain amount of flexibility when it comes to the reporting of certain transactions or activities. For example, two companies may report the expenses related to the purchase of the same item differently.

• Whether it’s to pass that big test, qualify for that big promotion or even master that cooking technique; people who rely on dummies, rely on it to learn the critical skills and relevant information necessary for success.
• Financial statements are documents companies use to communicate financial data to shareholders and the Securities and Exchange Commission (SEC).
• Ideally, cash from operating income should routinely exceed net income, because a positive cash flow speaks to a company’s financial stability and ability to grow its operations.
• When a financial statement reports the amounts for the current year and for one or two additional years, the financial statement is referred to as a comparative financial statement.

The user needs to know which methods the company uses when comparing financial statement figures with another company’s figures. Differences in net income could merely be a function of depreciation or valuation methodology, and the user would be unaware of that fact without the footnote. Below is a portion of ExxonMobil Corporation’s cash flow statement for fiscal year 2021, reported as of Dec. 31, 2021. Investing activities include any sources and uses of cash from a company’s investments in the long-term future of the company. A purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition is included in this category.

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The financial statements contain line items that express a numerical value on each item listed. Notes to the financial statements contain detailed information on the accounting decisions made by accountants during the creation of the financial statements as well as explanations of important factors that impact line items. Financial statement notes are used to provide shareholders and other interested parties with detailed information about the accounting decisions and extraneous factors that impact the financial positioning of an organization. For large corporations, these statements may be complex and may include an extensive set of footnotes to the financial statements and management discussion and analysis.

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Their main purpose is to provide a more detailed information regarding a given company’s revenues, expenses and net assets reported in its primary financial statements. However, they offer not only more detailed numerical data, but also narrative disclosures that cannot be found anywhere in the primary statements. Financial statement notes include elements such as accounting notes that detail how decisions were made by accountants at an organization, and an explanation of why certain items were included in different portions of the financial statements. The notes will also contain details about how inventory was valued for organizations that hold significant stocks of products in inventory. Personal financial statements may be required from persons applying for a personal loan or financial aid.

Notes to the financial statements are important disclosures that further explain numbers on the financial statements document. You can add notes to include supplementary information about the results of your engagement for your client, for instance. The MD&A is a useful starting point for understanding the financial statements and can also provide key insights into a company’s potential future performance. All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. [IAS 1.88] Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. Type I events affect the company’s accounting estimates booking on the financial statements.

The accrual basis of accounting records income when a sale is made and expenses when a bill is received. Subsequent events are events that happen after the date the financial statements are created but before the financial statements have been issued to the public. A contingent liability is a liability that has not occurred, but the conditions are favorable for the event to occur in the immediate future. Financial statements are documents companies use to communicate financial data to shareholders and the Securities and Exchange Commission (SEC).

To ensure our website performs well for all users, the SEC monitors the frequency of requests for SEC.gov content to ensure automated searches do not impact the ability of others to access SEC.gov content. Current guidelines limit users to a total of no more than 10 requests per second, regardless of the number of machines used to submit requests. For best practices on efficiently downloading information from SEC.gov, including the latest EDGAR filings, visit sec.gov/developer. You can also sign up for email updates on the SEC open data program, including best practices that make it more efficient to download data, and SEC.gov enhancements that may impact scripted downloading processes. Recently there has been a push towards standardizing accounting rules made by the International Accounting Standards Board (IASB). IASB develops International Financial Reporting Standards that have been adopted by Australia, Canada and the European Union (for publicly quoted companies only), are under consideration in South Africa and other countries.

This money belongs to the shareholders, who may be private owners or public investors. An ability to understand the financial health of a company is one of the most vital skills for aspiring investors, entrepreneurs, and managers to develop. Armed with this knowledge, investors can better identify promising opportunities while avoiding undue risk, and professionals of all levels can make more strategic business decisions. You can select View notes to switch to a note-only view, where the library lists all the available notes in the current category or group. In the note-only view, the trial balance groups show in light gray beneath the note.