presentation of investments in financial statements

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What Are Financial Statements?

How financial statements work.

• Balance Sheet
• Income Statement
• Cash Flow Statement
• Changes in Shareholder Equity
• Comprehensive Income

Nonprofit Financial Statements

• Limitations

The Bottom Line

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Financial Statements: List of Types and How to Read Them

• Valuing a Company: Business Valuation Defined With 6 Methods
• Valuation Analysis
• Financial Statements CURRENT ARTICLE
• 6 Basic Financial Ratios
• 5 Must-Have Metrics for Value Investors
• Earnings Per Share (EPS)
• Price-to-Earnings Ratio (P/E Ratio)
• Price-To-Book Ratio (P/B Ratio)
• Price/Earnings-to-Growth (PEG Ratio)
• Fundamental Analysis
• Absolute Value
• Relative Valuation
• Intrinsic Value of a Stock
• Intrinsic Value vs. Current Market Value
• Equity Valuation: The Comparables Approach
• 4 Basic Elements of Stock Value
• How to Become Your Own Stock Analyst
• Due Diligence in 10 Easy Steps
• Determining the Value of a Preferred Stock
• Qualitative Analysis
• Stock Valuation Methods
• Bottom-Up Investing
• Ratio Analysis
• What Book Value Means to Investors
• Liquidation Value
• Market Capitalization
• Discounted Cash Flow (DCF)
• Enterprise Value (EV)
• How to Use Enterprise Value to Compare Companies
• How to Analyze Corporate Profit Margins
• Return on Equity (ROE)
• Decoding DuPont Analysis
• How to Value Private Companies
• Valuing Startup Ventures

Financial statements are reports compiled by businesses that detail the company's financial activities and health. Financial statements are often audited by government agencies and accountants to ensure accuracy and for tax, financing, or investing purposes.

The primary financial statements of for-profit businesses include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar set of financial statements, though they have different names and communicate slightly different information.

Key Takeaways

• Financial statements provide governments, investors, executives, and lenders with a picture of a company's financial activities and profitability.
• Statements required by Generally Accepted Accounting Principles (GAAP) are the balance sheet, the income statement, and the statement of cash flows.
• The balance sheet provides an overview of assets, liabilities, and shareholders' equity as a snapshot in time.
• The income statement reports a company's revenues and expenses, including a company's profit figure called net income.
• The cash flow statement (CFS) tracks how a company uses its cash to pay its debt obligations and fund its operating expenses and investments.

Investopedia / Julie Bang

A business's financial data is used by internal and external parties to analyze that company's performance and make predictions about the likely direction of its stock price. One of the most important sources of reliable and audited financial data is the annual report , which contains the firm's financial statements.

The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.

Not all financial statements are created according to the same accounting rules. The rules used by U.S. companies are called Generally Accepted Accounting Principles, while the rules often used by international companies are International Financial Reporting Standards (IFRS). Additionally, U.S. government agencies use a different set of financial reporting rules.

Understanding the Balance Sheet

A company's balance sheet provides an overview of the company's assets, liabilities, and shareholders' equity at a specific time and date. The date at the top of the balance sheet tells you when this snapshot was taken; this is generally the end of its annual reporting period. Below is a breakdown of the items in a balance sheet.

• Cash and cash equivalents  are liquid assets, which may include Treasury bills and certificates of deposit.
• Accounts receivable   are the money owed to the company by its customers for the sale of its products and services.
• Inventory is the goods a company has on hand, intended to be sold as a course of business. Inventory may include finished goods, work in progress that is not yet finished, or raw materials on hand that have yet to be worked.
• Prepaid expenses are costs paid in advance of when they are due. These expenses are recorded as an asset because their value has not yet been recognized; should the benefit not be recognized, the company would theoretically be due a refund.
• Property, plant, and equipment (PPE) are capital assets owned by a company for its long-term benefit. This includes buildings used for manufacturing or heavy machinery used for processing raw materials.
• Investments are assets held for speculative future growth. These aren't used in operations; they are simply held for capital appreciation.
• Trademarks, patents, goodwill, and other intangible assets can't physically be touched but have future economic (and often long-term benefits) for the company.

Liabilities

• Accounts payable are the bills due as part of a business's operations. This includes utility bills, rent invoices, and obligations to buy raw materials.
• Wages payable are payments due to staff for time worked.
• Notes payable are recorded debt instruments that record official debt agreements, including the payment schedule and amount.
• Dividends  payable are dividends that have been declared to be awarded to shareholders but have not yet been paid.
• Long-term debt can include a variety of obligations, including sinking bond funds, mortgages, or other loans that are due in their entirety in more than one year.

Short-term debt is recorded as a current liability separate from long-term debt.

Shareholders' Equity

• Shareholders' equity is a company's total assets minus its total liabilities.  Shareholders' equity (also known as stockholders' equity ) represents the amount of money that would be returned to shareholders if all of the assets were liquidated and all debts paid off.
• Retained earnings  are part of shareholders' equity; this is the amount of net earnings that were not paid to shareholders as dividends.

Example of a Balance Sheet 

Below is a portion of ExxonMobil Corporation's  (XOM)  balance sheet for fiscal year 2023, reported as of Dec. 31, 2023.

• Total assets were $376.3 billion.
• Total liabilities were $163.8 billion.
• Total equity was $212.5 billion.
• Total liabilities and equity were $376.6 billion, which equals the total assets for the period.

Understanding the Income Statement

Unlike the balance sheet, the income statement covers a range of time, generally either a year or a quarter. The income statement provides an overview of revenues, expenses, net income, and earnings per share during that time.

The main purpose of the income statement is to convey details of profitability and the financial results of business activities; however, it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods, which provides valuable information about the success of operations to executive and management.

Investors can also see how well a company's management is controlling expenses to determine whether a company's efforts in reducing the cost of sales might boost profits over time.

Revenue falls into three categories: operating revenue, non-operating revenue, and other income.

Operating revenue is the revenue earned by selling a company's products or services. The  operating revenue for an auto manufacturer would be realized through the production and sale of autos. Operating revenue is generated from the core business activities of a company.

Non-operating revenue is the income earned from non-core business activities. These revenues fall outside the primary function of the business. Some non-operating revenue examples include income from:

• Interest earned on cash in the bank
• Renting out property
• Strategic partnerships like royalty payment receipts
• Advertisement displays located on the company's property

Other income is the revenue earned from other activities. Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.

Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include:

• The cost of goods sold (COGS)
• Selling, general and administrative expenses (SG&A)
• Depreciation or amortization
• Research and development (R&D).

Typical expenses include employee wages, sales commissions, and utilities such as electricity and transportation.

Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses.

Example of an Income Statement

Below is a portion of ExxonMobil Corporation's income statement for fiscal year 2023, reported as of Dec. 31, 2023.

• Total revenue was $344.6 billion.
• Total costs were $291.8 billion.
• Net income or profit was $36 billion.

Understanding the Cash Flow Statement

The cash flow statement (CFS) shows how cash is earned and spent by a company. The cash flow statement complements the balance sheet and  income statement .

The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing.

The cash flow statement contains three sections that report on the various activities for which a company uses its cash.

Operating Activities 

The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in:

• Cash accounts receivable
• Depreciation
• Accounts payable

These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.

Investing Activities

Investing activities include any sources and uses of cash from a company's investments in its long-term future, including changes in equipment, assets, or investments related to cash from investing. This includes:

• The purchase or sale of an asset
• Loans made to vendors or received from customers
• Payments related to a merger or acquisition
• Purchases of fixed assets such as property, plant, and equipment (PPE)

Financing Activities

Cash from financing activities includes the cash from investors or banks, as well as the cash paid to shareholders. Financing activities include:

• Debt issuance
• Equity issuance
• Stock repurchases
• Dividends paid
• Debt repayments

The cash flow statement reconciles the income statement with the balance sheet in three major business activities.

Example of a Cash Flow Statement

Below is a portion of ExxonMobil Corporation's cash flow statement for fiscal year 2023, reported as of Dec. 31, 2023. We can see the three areas of the cash flow statement and their results.

• Operating activities generated a positive cash flow of $55.4 billion.
• Investing activities generated cash outflows of -$19.3 billion for the period. Additions to property, plant, and equipment made up the majority of cash outflows, which means the company invested in new fixed assets.
• Financing activities generated cash outflows of -$34.3 billion for the period. Dividends paid out to shareholders and acquisitions of common stock comprised most of the cash outflows.

Understanding the Statement of Changes in Shareholder Equity

The statement of changes in equity tracks total equity over time. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement equals the total equity reported on the balance sheet. Investors use this information to understand the profitability of a company and its stock.

The formula for changes to shareholder equity will vary from company to company; in general, there are a couple of components:

• Beginning equity : This is the equity at the end of the last period that simply rolls to the start of the next period.
• (+) Net income : This is the amount of income the company earned in a given period. The proceeds from operations are automatically recognized as equity in the company, and this income is rolled into retained earnings at year-end.
• (-) Dividends : This is the amount of money that is paid out to shareholders from profits. Instead of keeping all of a company's profits, the company may choose to give some profits away to investors.
• (+/-) Other comprehensive income : This is the period-over-period change in other comprehensive income. Depending on transactions, this figure may be an addition or subtraction from equity.

In ExxonMobil's statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activities. This information is useful for analyzing how much money is being retained by the company for future growth as opposed to being distributed externally.

Understanding the Statement of Comprehensive Income

An often less utilized financial statement, the statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income (OCI). Other comprehensive income includes all unrealized gains and losses that are not reported on the income statement.

This financial statement shows a company's total change in income, even gains and losses that have yet to be recorded in accordance with accounting rules. Investors and lenders can use this information to get a more detailed and comprehensive picture of a company's financial health.

Examples of transactions that are reported on the statement of comprehensive income include:

• Net income (from the statement of income)
• Unrealized gains or losses from debt securities
• Unrealized gains or losses from derivative instruments
• Unrealized translation adjustments due to foreign currency
• Unrealized gains or losses from retirement programs

In the example below, ExxonMobil has over $1 billion of net unrecognized income. Instead of reporting just $36 billion of net income, ExxonMobil reports $37.3 billion of total income when considering other comprehensive income.

Nonprofit organizations record financial transactions across a similar set of financial statements. However, nonprofit organizations do not have shareholders and do not pay out profits. As a result, they use different financial statements to report their activities, income, and expenses.

These financial reports are used by:

• Donors, to assess a nonprofit's activities before donating
• Internal or auditors, to ensure that funds raised by a nonprofit are being well spent
• Government agencies, to ensure that a nonprofit is compliant with all legal and tax requirements

Statement of Financial Position

This is the equivalent of a for-profit entity's balance sheet. The largest difference is nonprofit entities do not have equity positions. Any residual balances after all assets have been liquidated and liabilities have been satisfied are called "net assets."

Statement of Activities

This is the equivalent of a for-profit entity's statement of income. This report tracks the changes in operation over time, including the reporting of donations, grants, event revenue, and expenses to make everything happen.

Statement of Functional Expenses

This report is specific to nonprofit entities. The statement of functional expenses reports expenses by entity function (often broken into administrative, program, or fundraising expenses). This information is distributed to the public to explain what proportion of company-wide expenditures are related directly to the nonprofit's mission.

Statement of Cash Flow

This is the equivalent of a for-profit entity's statement of cash flow. Though the accounts listed may vary due to the different nature of a nonprofit organization, the statement is still divided into operating, investing, and financing activities.

Limitations of Financial Statements

Although financial statements provide a wealth of information on a company, they do have limitations. The statements are often interpreted differently, so investors often draw divergent conclusions about a company's financial performance.

For example, some investors might want stock repurchases , while others might prefer to see that money invested in long-term assets. A company's debt level might be fine for one investor, while another might have concerns about the level of debt for the company.

When analyzing financial statements , it's important to compare multiple periods to determine any trends and compare the company's results to its peers in the same industry.

Lastly, financial statements are only as reliable as the information fed into the reports. Too often, it's been documented that fraudulent financial activity or poor control oversight have led to inaccurate financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown.

External auditors assess whether a company's financial statements have been prepared according to standardized accounting rules. This ensures that all companies are reporting their finances in the same way, which allows investors, lenders, and others to more easily understand their reports. External auditors also ensure that these financial statements are accurate with no misstatements or omissions, whether accidental or deliberate.

What Are the Main Types of Financial Statements?

The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, revenues, and costs, as well as its cash flows from operating, investing, and financing activities.

What Are the Benefits of Financial Statements?

Financial statements show how a business operates. They provide insight into how a business generates revenues, what those revenues are, what the cost of doing business is, how efficiently it manages its cash, and what its assets and liabilities are. Financial statements show how well or poorly a company is managed.

How Do You Read Financial Statements?

Financial statements are read in several different ways. First, financial statements can be compared to prior periods to understand changes over time better. Financial statements can also be compared between competitors in the same industry to see the differences in their business operations and profits. By comparing financial statements to other companies, analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry.

What Is GAAP?

Generally Accepted Accounting Principles (GAAP) are the rules by which publicly-owned United States companies must prepare their financial statements. These are the guidelines that explain how to record transactions, when to recognize revenue, and when expenses must be recognized. International companies may use a similar but different set of rules called International Financial Reporting Standards (IFRS).

Financial statements are the ticket to the external evaluation of a company's financial performance. The balance sheet reports a company's financial health through its liquidity and solvency, while the income statement reports its profitability. A statement of cash flow ties these two together by tracking sources and uses of cash. Together, these financial statements provide a picture of a business's financial standing that is used by management, investors, governments, and lenders.

U.S. Securities and Exchange Commission. " Exxon Mobile Corporation Form 10-K for the Fiscal Year Ended Dec. 31, 2023 ."

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Apple announces Chief Financial Officer transition

Text of this article

August 26, 2024

PRESS RELEASE

CUPERTINO, CALIFORNIA Apple today announced that Chief Financial Officer Luca Maestri will transition from his role on January 1, 2025. Maestri will continue to lead the Corporate Services teams, including information systems and technology, information security, and real estate and development, reporting to Apple CEO Tim Cook. As part of a planned succession, Kevan Parekh, Apple’s Vice President of Financial Planning and Analysis, will become Chief Financial Officer and join the executive team.

“Luca has been an extraordinary partner in managing Apple for the long term. He has been instrumental in improving and driving the company’s financial performance, engaging with shareholders, and instilling financial discipline across every part of Apple. We’re fortunate that we will continue to benefit from the leadership and insight that have been the hallmark of his tenure at the company,” said Tim Cook, Apple’s CEO.

“For more than a decade, Kevan has been an indispensable member of Apple’s finance leadership team, and he understands the company inside and out. His sharp intellect, wise judgment, and financial brilliance make him the perfect choice to be Apple’s next CFO.”

During his time as CFO, Maestri enabled essential investments and practiced robust financial discipline, which together helped the company more than double its revenue, with services revenue growing more than five times.

“It is the greatest privilege of my professional life to serve the world’s most innovative and admired company, and to work side by side with a leader as inspirational as Tim Cook,” said Maestri. “I’m looking forward to the next stage of my time at Apple, and I have enormous confidence in Kevan as he prepares to take the reins as CFO. He is truly exceptional, has a deep love for Apple and its mission, and he embodies the leadership, judgment, and values that are so important to this role.”

Parekh has been at Apple for 11 years and currently leads Financial Planning and Analysis, G&A and Benefits Finance, Investor Relations, and Market Research. Prior to this role, Parekh led Worldwide Sales, Retail, and Marketing Finance. He began his tenure leading the financial support of Apple’s Product Marketing, Internet Sales and Services, and Engineering teams.

Before joining Apple, Parekh held various senior leadership roles at Thomson Reuters and General Motors, where he also had extensive global experience. Parekh is an electrical engineer with a Bachelor’s of Science from the University of Michigan and an MBA from the University of Chicago.

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