Financial statements are the set of formal reports a business produces about its own money, showing where it came from, where it went and where it is now. The word that carries the most weight in that sentence is set. A financial statement on its own answers one question about one dimension of the business, and the reason they are named as a group is that no single one of them is meant to be read alone.
The Four the Securities Regulator Names
There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a statement of shareholders’ equity, shows changes in the interests of the company’s shareholders over time (SEC, Beginners’ Guide to Financial Statements).
Two of those four are point-in-time and two are period reports, and that is the difference that makes the set work. A balance sheet is a photograph at a date. An income statement and a cash flow statement are films of what happened between two of those dates. Each member has its own entry: balance sheet vs income statement, income statement, cash flow statement, and statement of stockholders’ equity.
Why the Count Is Argued Over
Search the term and the ranked questions ask for three, five and seven of them, which is a sign that the number is not settled by any single authority. The evidence for how that happens is in the regulator’s own guide: it names four and then says outright that it will look at each of the first three in more detail (SEC, Beginners’ Guide to Financial Statements). A treatment that follows only the detailed discussion arrives at three.
The count also moves because the notes are sometimes counted as a member of the set and sometimes as an attachment to it, and because a filing rule can require statements the guide’s list does not name. What is not in dispute is the content, and that is the safer thing to ask about: which reports a given entity has to produce, for which periods, and under whose rule.
The Notes Are Part of the Reading, Whatever They Are Counted As
The footnotes to financial statements are packed with information, and the regulator’s own highlights are the significant accounting policies and practices most important to the portrayal of the company’s financial condition and results, which often require management’s most difficult, subjective or complex judgments; income taxes, broken down by level, federal, state, local and foreign, with the main items affecting the effective tax rate described; pension plans and other retirement or post-employment benefit programs, including whether and by how much the plans are over or under funded; and stock options granted to officers and employees, including the method of accounting for stock-based compensation and its effect on reported results (SEC, Beginners’ Guide to Financial Statements). What those disclosures have to contain is set out in accounting footnotes.
Beside them, and distinct from them, sits the narrative. A narrative explanation of a company’s financial performance appears in a section of the quarterly or annual report entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations (SEC, Beginners’ Guide to Financial Statements), which is management’s own commentary rather than a statement, and which is worked through in MD&A.
How Many Years a Filer Actually Has to Give
For a business that files with the securities regulator, the set is not just a list of reports, it is a list with periods attached, and the periods are not the same for every member.
Balance sheets, two years. There must be filed, for the registrant and its subsidiaries consolidated and for its predecessors, audited balance sheets as of the end of each of the two most recent fiscal years, and if the registrant has been in existence for less than one fiscal year, an audited balance sheet as of a date within 135 days of the date of filing the registration statement (17 CFR 210.3-01(a)).
Income and cash flows, three years. There shall be filed, for the registrant and its subsidiaries consolidated and for its predecessors, audited statements of comprehensive income and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet being filed, or such shorter period as the registrant, including predecessors, has been in existence (17 CFR 210.3-02(a)).
One class of filer gets a shorter run, and only in one situation. A registrant that is an emerging growth company may, in a Securities Act registration statement for the initial public offering of the emerging growth company’s equity securities, provide audited statements of comprehensive income and cash flows for each of the two fiscal years preceding the date of the most recent audited balance sheet, or such shorter period as the registrant has been in existence (17 CFR 210.3-02(a)). The relief is tied to that filing and that offering, not to the company’s status generally, and the offering it belongs to is set out in initial public offering.
And the interim periods on top. For any interim period between the latest audited balance sheet and the date of the most recent interim balance sheet being filed, and for the corresponding period of the preceding fiscal year, statements of comprehensive income and cash flows shall be provided, and those interim statements may be unaudited (17 CFR 210.3-02(b)). The comparative half of that sentence is the part people drop: the current interim period alone does not satisfy it.
What Financial Statements Are Not
Financial Accounting
The statements are the output. Financial accounting is the branch of accounting that produces them, along with the question of who they are for and which framework binds them, and that is set out in financial accounting.
Pro Forma Statements
A pro forma statement is built on assumed facts rather than on what happened, and the difference between the two, along with what a pro forma presentation is not permitted to do, is set out in pro forma financial statements.
A Tax Return
Both are prepared from the same underlying records and neither is a restatement of the other. Where the two measurements of the same year diverge, and how the difference is carried on the balance sheet, is set out in ASC 740, deferred tax assets and deferred tax liability.
Common Questions
Not statement by statement, but as the end of a repeating sequence that starts with the transactions and ends with the books closed for the period. That sequence is set out in accounting cycle, and what has to be true before the statements come out of it is set out in adjusting entries and adjusted trial balance.
For the filings described above, the balance sheets and the annual statements of comprehensive income and cash flows are required to be audited (17 CFR 210.3-01(a) and 17 CFR 210.3-02(a)), while the interim statements may be unaudited (17 CFR 210.3-02(b)). Outside that filing context the question is different, and the three levels of service a firm can perform on a set of statements are set out in audited report.
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