financial statements
Formal records of a business's financial activities, comprising the income statement, balance sheet, and cash flow statement.
Example
“Before investing, she reviewed three years of financial statements to assess the company's revenue growth and debt levels.”
Memory Tip
FINANCIAL STATEMENTS = the three core reports. Income statement, balance sheet, cash flow statement.
Why It Matters
Financial statements help you understand the true financial health of a business, whether you are an investor, creditor, or employee. By reviewing these documents, you can make informed decisions about whether to invest in a company, lend money to it, or accept a job offer based on its stability and profitability.
Common Misconception
Many people believe that a company is doing well simply because it is making a profit on the income statement. However, a business can show profit while actually running out of cash or owing significant debts, which would be revealed by examining the cash flow statement and balance sheet together.
In Practice
If you are considering investing in a startup, you would review their financial statements to see that they earned 500,000 dollars in revenue last year but spent 600,000 dollars on operations, resulting in a 100,000 dollar loss on the income statement. You would also check their balance sheet to see they have only 50,000 dollars in cash remaining and owe 250,000 dollars in debt, which tells you the company may fail within months despite its promising revenue growth.
Etymology
FINANCIAL (money-related) STATEMENTS (formal written accounts). Official written STATEMENTS of FINANCIAL performance.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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