What Are Financial Statements? - Definition, Purpose & Importance

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  • 0:07 Kaycie and the…
  • 0:32 Introducing the…
  • 1:17 What Do Each of the…
  • 2:36 Why Are Financial…
  • 3:34 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Financial statements are big players in the world of accounting. In this lesson, you will be introduced to each of the financial statements. You will also learn what their role is in the accounting industry, who they are important to and why they are important.

Kaycie and the Financial Statements

Kaycie just got home from school. For the first time ever, she's ready to start on her homework. Tonight, she gets to do a report on her favorite band, the Financial Statements. She can't wait to get to school tomorrow and tell everybody what the Financial Statements are, what they do and why they are important. This is going to be the best homework she has ever done! Kaycie quickly sits down at the desk in her room and starts writing.

Introducing the Financial Statements

Have you ever heard of the Financial Statements? No? Well, let me introduce them to you. The Financial Statements are a group of reports that tell a company's financial status at a certain point in time. From company owners to potential investors and everyone in between, the fan base of the Financial Statements is far and wide. Everybody is interested in them.

Some people are interested in the Financial Statements because they want to know how much money they made. Some are interested in them because they want to know how much money they spent. Some are interested in them because they want to know how much money was reinvested in the company. Some just want to know whether or not they should invest themselves. Regardless of the reason, when the Financial Statements start playing a tune, people listen.

What Do Each of the Financial Statements Do?

Now it's time to introduce you to each one of the Financial Statements individually.

Issy is the lead singer of the group. His name, Issy, is short for Income Statement. Issy's job is to let fans know whether a company made or lost money in a given time period.

Next is the bass player, Sore, which is short for Statement of Retained Earnings. It is Sore's job to let fans know how much money that's made is retained and reinvested in the company.

The keyboard is played by Bash. Bash's real name is Balance Sheet. His job is to fill in all the gaps by listing all the assets, liabilities and owner's equity. Bash is a key player in the group, because he balances out the music. The assets side of Bash must equal the sum of the liabilities and owner's equity that Bash lists. An equation that is helpful in remembering what Bash does is Assets = Liabilities + Owner's Equity.

The last member of the Financial Statements is the drummer, SoFly. SoFly, which is short for Statement of Cash Flows, is responsible for making sure that everyone knows how much money came into a company and how much went out. Issy, Sore, Bash and SoFly all together make up one of the best bands in the accounting world… the Financial Statements!

Why Are the Financial Statements Important?

The Financial Statements are the number one band in accounting today. Because of their popularity, they are influential to different groups of people. One group of people that is influenced by the Financial Statements is business owners. Business owners learn how much money they have made, spent and retained from the Financial Statements.

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