Introduction to financial statements


From the last two articles we know that financial statements are part of a broad report call annual report. Now we proceed to understand what financial statements are. Law requires corporate entities to keep correct financial records of all the transactions. This is because; the company does business with the money of the public (shareholders).In order make sure that these funds are utilized properly, law makes it mandatory for companies to keep systematic record of all financial transactions. From these financial records, the annual profit or loss from the business is ascertained by an independent qualified auditor. This audited statement forms part of the annual report.

FIRST THINGS FIRST

The very first point you have to understand is that apart from annual financial statements, these are also prepared on monthly , quarterly and half yearly basis so that the management has absolute control over what’s happening and they are up-to-date with the financial position of the business. Quarterly statements will be published every three months, half yearly statements after the end of six months of operation and the final statement for the whole year will be published after twelve months of business. Out of these, the full year official audited statements (or annual financial statements) are the most important ones since, as said above, it presents the grand summary of business done in a year and it’s is also checked and certified by an independent financial auditor.

This doesn’t mean that quarterly and half yearly statements have no importance to the investor. They are important too. Since Quarterly / half yearly statements provide a summary of what has happened in the last 3/6 months, these figures are used by analysts to judge whether the company’s performance is up to the mark as expected. Analysts may also make projected or estimated figures using these statements and predict about the probable performance of the company.

Another important use of these quarterly statements is that it is possible to compare the performance from quarter to quarter. Such comparisons may reveal certain important aspects of the business- for example, the seasonal nature of the business. A company’s ability to hit the estimates expected by the investors every quarter also affects the market price of its shares. For example – If the quarterly financial result of a company exceeds investor’s expectations, you can witness a jump in its share price. So all these statements has its own importance.

A WORD OF CAUTION: as said above, analyzing quarterly or half yearly statements are good. However, it doesn’t not mean that you can rely on it totally. That’s because, it’s possible that a company that has shown promising results in the first quarter may face difficulties going forward. Uncertainty is a big factor in business. Predictions of all the market experts and brokers can go wrong. Why should we say about brokers? Those CEOs themselves can go wrong in certain cases.

now that you’ve got an idea about financial statements in general, our next article will explain the components of financial statements in detail.

You may like these posts:

  1. Understanding Annual reports.
  2. Introduction to financial ratios
  3. How to read an Annual report.

1 Response to “Introduction to financial statements”

Anosync

April 19, 2016 at 6:28 pm

Thanks.

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