What are financial statements?

Financial statements, also referred to as annual accounts, financial reports or financial statements, are the accounting records of a company and show the economic structure of the company.

The financial statements show the company’s financial year. The annual accounts allow investors to assess whether or not the company has a solvent structure and thus to analyse whether or not it is profitable to invest in it.

Components of the financial statements

The financial statements are classified into balance sheet, income statement, cash flow statement, statement of changes in equity and notes to the financial statements.

  • Balance sheet: is the accounting document that reports on the company’s situation, presenting its rights and obligations, as well as its capital and reserves, valued in accordance with generally accepted accounting criteria.
    The balance sheet shows assets, liabilities and equity.
  • Income statement: this compares the company’s income with its costs, and shows whether there has been a profit. Within this, there are two elements: income and expenses.
  • Statement of changes in equity: shows the changes in the inflows and outflows in the company’s operations between the beginning of the period and the end of the period, usually one year.
  • Statement of cash flows: shows the sources, timing and use of the company’s cash, using either direct (the most commonly used) or indirect estimates. The direct estimate shows the net cash generated by operations. This variable is of great importance for analysing the company’s situation as it reflects its liquidity.
  • Notes to the annual accounts: this is a document that serves to expand on the information contained in the annual accounts. The notes to the annual accounts should be presented and prepared together with the other financial statements.

The purpose of the notes to the annual accounts is to complete, expand on, comment on and clarify the other documents included in the annual accounts.

Importance of the annual accounts

The annual accounts are of great importance as they reflect the financial year of a company in one year.

The financial statements are a reflection of the company’s activity and are public information that can be accessed by everyone.

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