FINANCIAL STATEMENTS Meaning and
Definition
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Financial statements refer to the formal records that present the financial activities and performance of a business entity or organization. These statements are typically prepared at the end of a defined accounting period, such as a fiscal year, and serve as a vital tool for evaluating the financial standing and progress of the entity. Financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and are generally required for external reporting to stakeholders, such as investors, creditors, and regulatory bodies.
There are three main types of financial statements: the balance sheet, income statement, and cash flow statement. The balance sheet provides a snapshot of the entity's financial position at a specific point in time, including its assets, liabilities, and shareholders' equity. The income statement, or profit and loss statement, presents the entity's revenues, expenses, gains, and losses incurred during a given period, ultimately determining its net income or net loss. Lastly, the cash flow statement outlines the cash inflows and outflows resulting from the entity's operating, investing, and financing activities, providing insight into its liquidity and cash management.
Financial statements are essential for assessing a company's financial health, profitability, and potential risks. They enable stakeholders to make informed decisions about investing, lending, or partnering with the organization. Moreover, financial statements aid in financial analysis, benchmarking, and forecasting, facilitating the identification of trends and patterns that can guide future strategies and decision-making.
Etymology of FINANCIAL STATEMENTS
The word "financial" originated in the mid-18th century from the French word "financier", which referred to a person engaged in monetary transactions. It ultimately comes from the Old Italian word "finanza", meaning "end of a payment or lending". The term "statements" comes from the Latin word "statum" or "stare", which means "to stand" or "to be in a fixed position".
In the context of "financial statements", the word "financial" describes anything related to finance or money, while "statements" refers to statements that express or present information. Thus, the combination of these two words creates the term "financial statements" to describe the documents that present the financial information of an entity, such as a company or organization.
