The financial statements tell us about the financial position of the company or business. The stakeholders of a business mainly use the financial statements to get an idea about the financial performance of the company. The key stakeholders of a business are: shareholders & creditors, customers, employees, suppliers, state and the community.
The major financial statements prepared by a business are: profit & loss account, balance sheet, cash flow statement and statement of changes in equity. Financial statements are prepared according to Generally Accepted Accounting Principles (GAAP). One reason why financial statements are prepared according to a common set of accounting standards is to enable comparison of financial performance of two different businesses or companies. If financial statements are not prepared according to a common set of accounting standards then it will become difficult for end users to understand them. International Financial Reporting Standards (IFRS) are now being used by major international corporations to prepare their financial statements. It is mandatory for listed public limited companies to come out with their financial statements at the end of every financial quarter. A listed public limited company is one that has raised money from the public and is listed on a stock exchange.
The profit & loss statement (also known as income statement) gives the financial performance of a company in a given financial period. It gives the revenues, costs and profit (or loss) of a company in the period. The profit & loss statement begins with the amount of revenue or sales of the company during the period. Below the sales are costs of goods or services produced by the company.
The costs of goods and services are deducted from revenue to get the gross profit in the period. The operating expenses are deducted from the gross profit to get the operating profit of the company. Operating expenses include selling expenses, general & administrative expenses and depreciation. Other income is added to operating profit to get the profit before interest and taxes. The interest expense is deducted to get the profit before tax. Tax expenses are deducted to get profit after tax.