Financial Statements

The preparation of financial statements is governed by a set of rules, guidelines and principles which allow users to study the information presented by companies in a standardized format and benchmark their performance with peers.

These rules, guidelines and principles are covered by GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). US companies report using GAAP while European and other international companies follow IFRS. Though there are some differences between IFRS and GAAP, efforts are being made by various standard setting authorities to make them as integrated as possible so that comparison of companies across geographies becomes more meaningful. Some companies may also prepare their accounts based on guidelines laid down by authorities in their respective countries.

The main financial statements are balance sheet, income statement or profit & loss statement and cash flow. A balance sheet provides a summary of assets and liabilities and indicates the financial position of the company on a particular date. Income statement or P&L provides information about incomes and expenses. It indicates the financial performance of the company over a period of time. This period of time could be a quarter, 6 months or 12 months. Cash flow focuses on the movement of cash i.e. cash inflows & outflows during a financial period.