Annual Financial Statements

What are Annual Financial Statements?

Definition: Annual financial statements are financial reports based on a 12-month consecutive time period. The most common set of financials are based on the calendar year, but they can also be based on a company’s fiscal year.

Public companies are required to issue statements at interim periods throughout the year as well as reports covering the complete year’s financial activity. The most common set of reports issued are the general-purpose financial statements that include a balance sheet, income statement, statement of retained earnings, and statement of cash flows. Investors and creditors base their business decisions on the analysis of these reports along with management’s notes.

Annual financial statements are reports created annually that quantifiably describes the financial viability of a company. This includes a statement of income, statement of changes in net worth and a balance sheet. It also often includes a cash flow statement. These elements should be tracked on a monthly basis for the most accurate reporting.

Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.

Relevant financial information is presented in a structured manner and in a form which is easy to understand. They typically include four basic financial statements accompanied by a management discussion and analysis:

  • A balance sheet or statement of financial position, reports on a company’s assets, liabilities, and owners equity at a given point in time.
  • An income statement—or profit and loss report (P&L report), or statement of comprehensive income, or statement of revenue & expense—reports on a company’s income, expenses, and profits over a stated period. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the stated period.
  • A statement of changes in equity or statement of equity, or statement of retained earnings, reports on the changes in equity of the company over a stated period.
  • A cash flow statement reports on a company’s cash flow activities, particularly its operating, investing and financing activities over a stated period.

Example

The balance sheet lists a recap of the company’s assets, liabilities, and equity that existed at the end of the year. This report is a snapshot of the financial position of the company on a single date in time.

The income statement reports the income and expenses of the company during a period of time. Since the time frame covered by the income statement is larger than the time frame covered by the balance sheet, the income statement is considered to be more reliable or at least a more complete view of the company activities.

The statement of stockholders equity is a report that simply recaps the transactions that affected the equity accounts during the period. Transactions like dividends, owner’s investments, and mergers generally tend to be listed on this report along with an explanation in the notes section of the full report.

The cash flows statement reports how the company generated and used its cash during an accounting period. It splits cash flows into three main sections: operations, investing, and financing.

All of these reports combined with the management analysis and discussion and financial notes sections are typically issued annually in the third month following the end of the previous accounting period. Thus, a calendar year-end business would issue their statements in March.

Purpose for Business Entities

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization’s financial position.

Financial statements are intended to be understandable by readers who have “a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.” Financial statements may be used by users for different purposes:

  • Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management’s annual report to the stockholders.
  • Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.
  • Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.
  • Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.

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