Financial Statements

Importance of Financial Statement

Financial statements are crucial sources of information for managers to make financial decisions,
is a document that provides a general overview of the company's financial health and is utilized
principal by managers, investors, creditors, and other interested parties to make decisions
regarding the company (Ross, 2019). For example, Air Canada recently reported its fourth
quarter and full year 2022 financial report, revealing a record fourth quarter passenger revenue of
$4.062 billion, double the amount from the fourth quarter of 2021 and two percent higher than
the fourth quarter of 2019. Additionally, they announced a record fourth-quarter operating
revenue of $4.680 billion, 71 percent higher than the fourth quarter of 2021 and six percent
higher than the fourth quarter of 2019. Lastly, their Total liquidity was over $9.8 billion on
December 31, 2022 (Air Canada, 2023).
Based on these results, investors have been confident about Air Canada's strong balance sheet,
which has enabled it to invest in new aircraft and technology. In addition, Air Canada has
benefited from its different partnerships with other airlines, such as WestJet and Porter Airlines,
which have helped Air Canada expand its business (Air Canada, 2023).
Types and Uses of Financial Statements
Understanding the concept of reading financial statements and each type is essential. In addition,
comparing them with real-life use can help to understand them easily.
Balance Sheet
A balance sheet is a financial statement that summarizes a company’s assets, liabilities, and
shareholder’s equity at a specific time. This kind of statement provides an overview of a
company’s financial position and can be used to assess its liquidity, solvency, and overall
financial health. Usually, investors need this information to understand the company’s behavior
to make decisions (SEC, 2007).
Income Statement
The income statement is a financial statement that summarizes a company’s revenues and
expenses over a given period of time. It is used to calculate the net income or loss of the business
during the period and can be used to assess the profitability of the business. In this case, the
income statement is used to report the company’s performance over a specific period of time; for
example, it can be used to compare the behavior of two different companies (SEC, 2007).
Cash Flow Statement
A cash flow statement is a financial statement that summarizes the sources and uses of cash for a
given period of time. It provides an overview of how cash is generated and used by the business
during the period and can be used to assess its liquidity position (SEC, 2007). Companies
normally use this kind of statement to track the movement of cash, and in some cases, this
document lets companies know their solvency.
Relevant information for Managers
Basically, these statements are an essential tool for managers to make decisions related to the
company’s course of action. With this information, managers can understand the company’s
financial position, including its assets, liabilities, and equity, and make decisions based on these
results. Identify areas of improvement that can be achieved through the income statement
analysis.
Managers can realize a company’s financial health by understanding the fundamentals of
financial statements. For example, examining the cash flow statement to understand how cash is
being generated and used, analyzing the balance sheet to assess liquidity and solvency,
interpreting financial ratios such as return on investment, debt-to-equity ratio, and operating
margin, and utilizing financial statements to make informed decisions about investments,
financing, and operations (Harvard, 2020).
Relevant Information for Investors and Creditors
Some investors are willing to realize essential information about the company’s financial
behavior. In this case, the income statement is generally considered the most reliable financial
statement, even when using a cash basis accounting system which can reduce its clarity. It is an
essential tool for lenders and investors (CFO, 2020).
Conversely, creditors typically use financial statements such as the balance sheet and cash flow
statement to assess a borrower's credit. The income statement provides information about a
company's revenues and expenses over time, which helps creditors determine whether the
borrower is generating enough revenue to cover its expenses (CFO, 2020).
Relevant information for Managers
Some investors feel attracted to good wealth companies such as Apple Inc., which uses its
financial statements to attract investors showing them its strong financial performance and
growth potential. The company's financial statements are provided investors with detailed
information about the company's revenue, expenses, profits, and cash flow. This information
helps investors assess the company's financial health and make informed decisions about whether
to invest in the company (Carmichael, 2022).
List of references
Canada, A. (2023, February 17). Air Canada Reports Fourth Quarter and Full Year 2022

Financial Results. https://www.newswire.ca/news-releases/air-canada-reports-fourth-

quarter-and-full-year-2022-financial-results-873706503.html
Carmichael, C. (2022, December 31). Understanding Apple's Capital Structure. Investopedia.

https://www.investopedia.com/articles/investing/081716/understanding-apples-capital-

structure-aapl.asp

CFO. (2020, July 23). Which Financial Statements are Required to Get Funding?

https://www.cfoselections.com/perspective/which-financial-statements-are-required-to-

getfunding#:~:text=The%20income%20statement%20tends%20to,component%20for

%20lenders%20and%20investors.

How & Why Managers Use Financial Statements | HBS Online. (2020, June 16). Business

Insights Blog. https://online.hbs.edu/blog/post/how-managers-use-financial-statements

SEC.gov | Beginners’ Guide to Financial Statement. (2007, February 5).

https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguide