What are Financial Statements?

Financial statements are documents that systematically show a company's financial condition and operating performance. They primarily provide important information to various stakeholders, including investors, creditors, management, and government agencies. Financial statements generally consist of three main reports: the balance sheet, the income statement, and the cash flow statement. Each report covers a specific financial aspect of the company and is used comprehensively to evaluate the company's financial condition and operating performance.

1. Balance Sheet

The balance sheet shows a company's assets, liabilities, and equity at a specific point in time. This allows you to see the assets a company possesses and how those assets are financed.

• Assets:Includes all the property owned by a company, such as cash and cash equivalents, accounts receivable, inventory, tangible assets (buildings, equipment, etc.), and intangible assets (patents, trademarks, etc.). Assets can be divided into current assets and non-current assets. Current assets are assets that can be converted into cash within one year, while non-current assets are assets held for more than one year.
• Liabilities:Includes all the debts a company must repay, such as bank loans, accounts payable, accrued expenses, and bonds payable. Liabilities are also divided into current liabilities and non-current liabilities. Current liabilities are debts that must be repaid within one year, while non-current liabilities are debts with a repayment period of more than one year.
• Equity:The amount remaining after subtracting liabilities from assets; it includes the shareholders' capital investment. Equity is generally composed of issued shares, additional paid-in capital, retained earnings, treasury stock, etc.

2. Income Statement

The income statement shows net income through a company's revenues and expenses over a period of time. This allows you to understand the company's profitability and operational efficiency.

• Revenue:The total amount obtained from product sales or service provision. Also called sales revenue, it represents the revenue generated from a company's main business activities.
• Expenses:All costs incurred to generate revenue, such as cost of goods sold, salaries, rent, depreciation, and advertising expenses. Expenses can be divided into operating expenses and non-operating expenses, with operating expenses primarily referring to costs related to the production and sale of products.
• Net Income:The amount remaining after subtracting expenses from revenue, representing a company's actual profit. Net income can be divided into pre-tax income and after-tax income, where pre-tax income refers to net income before tax deductions, and after-tax income refers to net income after tax deductions.

3. Cash Flow Statement

The cash flow statement shows the inflows and outflows of cash over a period of time. This allows you to verify a company's cash liquidity. The cash flow statement is divided into operating activities, investing activities, and financing activities.

• Operating Activities:Cash flow resulting from day-to-day operating activities. This includes changes in accounts receivable, accounts payable, and inventory.
• Investing Activities:Cash flow resulting from the purchase or sale of assets and investment activities. This includes the acquisition and disposal of tangible and intangible assets, and the purchase and sale of financial instruments.
• Financing Activities:Cash flow resulting from financing activities such as capital raising and debt repayment. This includes issuing stock, paying dividends, increasing and repaying borrowings.

Conclusion

Financial statements are important tools that clearly show a company's financial condition and operating performance. Through them, stakeholders can evaluate a company's financial health and make decisions regarding investment or lending. The ability to understand and analyze financial statements is crucial in the finance and management fields.