Introduction to Financial Statements
The documents and bookkeeping registrations constitute the basis of the financial statements that the company prepares periodically (yearly or quarterly).
Different Periods for Financial Statements
- Annual financial statements: Financial statements prepared once a year. The year is usually defined as the calendar year, beginning on January 1 and ending on December 31. Each year publicly traded companies must submit financial statements to the Securities and Exchange Commission (SEC) that have been audied by an independent accountant. Statements that have been audited by the accountant are called audited financial statements.
- Statements for other periods: In addition to the annual statements, the New York Stock Exchange requires all listed companies to prepare quarterly financial statements (1 quarter equals 3 months), i.e. financial statements for the three months ending on March 31, June 30, September 30, and December 31. None of the statements are required to be audited, except for the December 31 statement. For reasons of management and control, many companies prepare unaudited monthly financial statements. Theoretically, companies could prepare financial statements every day or every week, but this does not occur in practice.
- The financial statements in the examples in this course: The financial statements in the examples in this course usually relate to a one year (calendar year) period, unless explicitly stated otherwise. Financial statements for other periods in this course are usually for one month.
Elements of the Financial Statements
The financial statements include three main elements:
- The balance sheet.
- The profit and loss statement.
- The cash flow statement.
Each of the three financial statements is presented in two parts:
Part 1 – a summary statement, which usually fits on a single page.
Part 2 – supplementary particulars taking up a number of pages appear later in the financial statements.
The summary statements present the main headings in the financial statements. Each of the main headings includes a series of subheadings and sub-subheadings, which appear in the second part of the financial statements.
