A financial accounting statement is a document that establishes the positive or negative financial health of a company in terms of liabilities, assets, income, expenses, cash-on-hand, and ownership ratios. Every country has its own accounting standards that establish the basic format for a financial accounting statement. Standard statements make it possible for investors, analysts, and the public to evaluate the performance of companies comparatively, because all companies are expected to produce the same sorts of documents using established computations.
In the U.S., the Financial Accountings Standards Board has established Generally Accepted Accounting Principals (GAAP). The GAAP defines a financial accounting statement as a balance sheet, income statement, statement of cash flows, or a statement of owner’s equity. Companies prepare these documents as a matter of course and to comply with public expectations and regulatory requirements.
GAAP establishes a balance sheet as a picture of the financial status of a company at specific point in time through an analysis of the company’s assets, liabilities, and outstanding equity. An income statement presents the expenses of a company over a period of time, and details both the money made and the money spent. A statement of cash flows shows how the company used its cash over time, tracking the change in the company’s bank accounts. An owner’s equity statement documents how much capital the company’s owners have contributed to or withdrawn from the company.
Public companies are required by government regulators to file financial statements every year. The most important role of GAAP in the preparation of a financial accounting statement is the establishment of how the numbers that populate the statement should be derived. A company’s accountant knows what should be considered an expense, for example, or an asset, and how to compute the values of statement categories. If a public company doesn’t strictly adhere to GAAP in its accounting methods, government regulators will penalize it.
Even though other countries have different accounting standards, their companies will often prepare some version of the four basic financial statements in use in the U.S. Globalization and the interconnectedness of international economies have underscored the necessity of a common basis of evaluation for companies across borders. With more people investing in global stock funds, financial statements are the only reliable way for investors to determine whether to buy or sell stock, how their investments are performing comparatively, and to evaluate whether their investments remain safe.
