what are financial statements 
financial statements are written records that convey the financial activities of a company financial statements are often audited by government agencies and accountants to ensure accuracy and for tax financing or investing purposes for profit primary financial statements include the balance sheet income statement statement of cash flow and statement of changes in equity nonprofit entities use a similar but different set of financial statements investopedia julie bangunderstanding financial statementsinvestors and financial analysts rely on financial data to analyze a company s performance and make predictions about the future direction of its stock price one of the most important resources of reliable and audited financial data is the annual report which contains the firm s financial statements the financial statements are used by investors market analysts and creditors to evaluate a company s financial health and earnings potential the three major financial statement reports are the balance sheet income statement and statement of cash flows not all financial statements are created equally the rules used by u s companies are called generally accepted accounting principles while the rules often used by international companies are international financial reporting standards ifrs in addition u s government agencies use a different set of financial reporting rules balance sheetthe balance sheet provides an overview of a company s assets liabilities and shareholders equity at a specific time and date the date at the top of the balance sheet tells you when this snapshot was taken this is generally the end of its annual reporting period below is a breakdown of the items in a balance sheet below is a portion of exxonmobil corporation s xom balance sheet for fiscal year 2021 reported as of dec 31 2021 exxonmobilincome statementunlike the balance sheet the income statement covers a range of time which is a year for annual financial statements and a quarter for quarterly financial statements the income statement provides an overview of revenues expenses net income and earnings per share operating revenue is the revenue earned by selling a company s products or services the operating revenue for an auto manufacturer would be realized through the production and sale of autos operating revenue is generated from the core business activities of a company non operating revenue is the income earned from non core business activities these revenues fall outside the primary function of the business some non operating revenue examples include other income is the revenue earned from other activities other income could include gains from the sale of long term assets such as land vehicles or a subsidiary primary expenses are incurred during the process of earning revenue from the primary activity of the business expenses include the cost of goods sold cogs selling general and administrative expenses sg a depreciation or amortization and research and development r d typical expenses include employee wages sales commissions and utilities such as electricity and transportation expenses that are linked to secondary activities include interest paid on loans or debt losses from the sale of an asset are also recorded as expenses the main purpose of the income statement is to convey details of profitability and the financial results of business activities however it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods investors can also see how well a company s management is controlling expenses to determine whether a company s efforts in reducing the cost of sales might boost profits over time below is a portion of exxonmobil corporation s income statement for fiscal year 2021 reported as of dec 31 2021 exxonmobilcash flow statementthe cash flow statement cfs shows how cash flows throughout a company the cash flow statement complements the balance sheet and income statement the cfs allows investors to understand how a company s operations are running where its money is coming from and how money is being spent the cfs also provides insight as to whether a company is on a solid financial footing the cash flow statement contains three sections that report on the various activities for which a company uses its cash those three components of the cfs are listed below the operating activities on the cfs include any sources and uses of cash from running the business and selling its products or services cash from operations includes any changes made in cash accounts receivable depreciation inventory and accounts payable these transactions also include wages income tax payments interest payments rent and cash receipts from the sale of a product or service investing activities include any sources and uses of cash from a company s investments in its long term future a purchase or sale of an asset loans made to vendors or received from customers or any payments related to a merger or acquisition are included in this category also purchases of fixed assets such as property plant and equipment ppe are included in this section in short changes in equipment assets or investments relate to cash from investing cash from financing activities includes the cash from investors or banks and the cash paid to shareholders financing activities include debt issuance equity issuance stock repurchases loans dividends paid and debt repayments the cash flow statement reconciles the income statement with the balance sheet in three major business activities below is a portion of exxonmobil corporation s cash flow statement for fiscal year 2021 reported as of dec 31 2021 we can see the three areas of the cash flow statement and their results exxonmobilstatement of changes in shareholder equitythe statement of changes in equity tracks total equity over time this information ties back to a balance sheet for the same period the ending balance on the change of equity statement equals the total equity reported on the balance sheet the formula for changes to shareholder equity will vary from company to company in general there are a couple of components in exxonmobil s statement of changes in equity the company also records activity for acquisitions dispositions amortization of stock based awards and other financial activities this information is useful for analyzing how much money is being retained by the company for future growth as opposed to being distributed externally statement of comprehensive incomean often less utilized financial statement the statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income oci other comprehensive income includes all unrealized gains and losses that are not reported on the income statement this financial statement shows a company s total change in income even gains and losses that have yet to be recorded in accordance with accounting rules examples of transactions that are reported on the statement of comprehensive income include in the example below exxonmobil has over 2 billion of net unrecognized income instead of reporting just 23 5 billion of net income exxonmobil reports nearly 26 billion of total income when considering other comprehensive income 1nonprofit financial statementsnonprofit organizations record financial transactions across a similar set of financial statements however due to the differences between a for profit entity and a purely philanthropic entity there are differences in the financial statements used the standard set of financial statements used for a nonprofit entity includes the purpose of an external auditor is to assess whether an entity s financial statements have been prepared following prevailing accounting rules and whether any material misstatements are impacting the validity of results limitations of financial statementsalthough financial statements provide a wealth of information on a company they do have limitations the statements are often interpreted differently so investors often draw divergent conclusions about a company s financial performance for example some investors might want stock repurchases while others might prefer to see that money invested in long term assets a company s debt level might be fine for one investor while another might have concerns about the level of debt for the company 