Financial statement facts for kids
Financial statements are like special reports that show how a business, person, or other group is doing with their money. They are formal records of all the money activities and financial health.
These reports present important money information in a clear and easy-to-understand way. They usually include four main financial statements, often with extra notes and explanations.
- A balance sheet (also called a statement of financial position) shows what a company owns (its assets), what it owes (its liabilities), and what belongs to the owners (their equity) at a specific time.
- An income statement (also known as a profit and loss report) tells you how much money a company earned (its income) and spent (its expenses) over a certain period. It shows if the company made a profit or a loss.
- A statement of changes in equity explains how the owners' share of the company changed over a period.
- A cash flow statement tracks all the money coming into and going out of a company. It shows cash from daily business, investing, and financing activities over a period.
It's important to remember that a balance sheet is like a photo taken at one moment in time. But the income statement, statement of changes in equity, and cash flow statement show what happened over a period of time.
For big companies, these statements can be very detailed. They often include many footnotes that explain each item on the reports more deeply. These notes are a key part of the financial statements.
Contents
Why Financial Statements Are Important
Financial statements help people understand a company's money situation, how it performed, and how its money position changed. This information helps many different people make smart decisions.
These reports should be easy to understand, useful, trustworthy, and easy to compare. The money, debts, ownership, income, and expenses shown are all about a group's financial health.
Financial statements are meant for people who know a bit about business and are willing to study the information carefully. Different people use these statements for different reasons:
- Owners and Managers need financial statements to make big decisions about how the business will keep running. They use financial analysis to understand the numbers better. These reports are also part of the annual report given to stockholders.
- Employees use these reports when talking about pay, promotions, or union agreements with management.
- Future Investors look at financial statements to decide if investing in a business is a good idea. Financial experts often prepare analyses for investors to help them make investment choices.
- Banks and Lenders use these reports to decide if they should lend money to a company. This money might be for daily operations or for big plans like expanding the business.
- Stockholders sometimes want to see how their money (share capital) is being managed. Financial statements help them confirm that the company is handling their investment wisely.
Consolidated Financial Statements
Sometimes, a big company owns other smaller companies (called subsidiaries). Consolidated financial statements combine the money information of the main company and all its subsidiaries. This makes it look like they are one single big business.
Government Financial Reports
The rules for how governments record and show their money information can be different from those for businesses or non-profit groups. Governments might use different ways of tracking money, like accrual accounting or cost accounting. They also use a different list of accounts.
Personal Financial Statements
People might need to provide personal financial statements when applying for a personal loan or financial aid. These usually show a person's assets (what they own) and liabilities (what they owe). They might also show personal income and expenses. The organization giving the loan or aid decides what form to use.
Audits and Legal Rules
In many countries, public companies usually need an audit of their financial statements. An audit is like a check-up done by independent accountants or auditing firms. They make sure the statements are fair and accurate. The results of this check-up are put into an auditor's report. This report usually says if the financial statements are fair or if there are any issues. The audit report is often included in the company's annual report.
In the United States, especially after events like Enron, there has been a lot of focus on how accurate financial statements are. Top company leaders, like the chief executive officer (CEO) and chief financial officer (CFO), are personally responsible for making sure the financial reports are fair and give an accurate picture of the company.
Rules for Financial Statements
Different countries used to have their own accounting rules, which made it hard to compare companies from different places. To make sure financial statements are similar and easy to compare, there are sets of guidelines and rules. These are often called Generally Accepted Accounting Principles (GAAP). They provide the basic rules for preparing financial statements.
Recently, there's been a big effort to make accounting rules the same worldwide. The International Accounting Standards Board (IASB) creates International Financial Reporting Standards (IFRS). Many countries, like Australia, Canada, and the European Union, have started using IFRS. The United States is also working to make its GAAP rules more similar to IFRS over time.
Annual Reports for Investors
To attract new investors, public companies often put their financial statements into an attractive annual report to shareholders. These reports are printed on nice paper with cool pictures and graphics. They try to show the company's exciting culture and are almost like a marketing brochure. The company's CEO usually writes a letter to shareholders, talking about how the company performed and its financial highlights.
Before the internet, the annual report was the main way for companies to talk to individual shareholders. Big, well-known companies (called blue chip companies) spent a lot of money to create and mail out beautiful annual reports to every shareholder. These reports were often designed like fancy coffee table books.
Moving to Electronic Statements
For hundreds of years, financial statements were made on paper. But with the growth of the internet, more and more financial statements are now created electronically. Common electronic forms are PDF and HTML. However, a person still has to read these to understand the information.
More recently, a global standard called XBRL (Extensible Business Reporting Language) has become popular. XBRL allows financial statements to be created in a structured format that computers can easily read and understand. Many regulators around the world, like the U.S. Securities and Exchange Commission, now require companies to submit their financial information using XBRL.
See also
In Spanish: Estados financieros para niños
- Accountable Fundraising
- Corporate financial accounting
- Financial statement analysis
- Comprehensive annual financial report
- Model audit
