Historical financial statements: Overview, definition, and example
What are historical financial statements?
Historical financial statements are financial reports that provide a record of a company’s financial performance and position over a specific period in the past. These statements typically include the income statement, balance sheet, and cash flow statement. Historical financial statements are used to assess a company’s financial health and performance in previous periods, helping stakeholders, such as investors, creditors, and management, understand trends and make informed decisions.
These statements are usually prepared in accordance with accounting standards and reflect the company’s actual performance rather than projections or estimates.
Why are historical financial statements important?
Historical financial statements are important because they provide a factual, objective view of a company's financial health and operating results over a specific period. By analyzing past financial performance, stakeholders can identify patterns, trends, and potential risks that may influence future performance. They are also essential for making comparisons with other companies, industry benchmarks, and financial projections.
For investors and lenders, historical financial statements offer a basis for assessing a company's profitability, liquidity, and overall financial stability. For businesses, these statements help with budgeting, planning, and strategic decision-making.
Understanding historical financial statements through an example
Imagine a company preparing its historical financial statements for the year 2022. The income statement for that year would show the company’s revenue, expenses, and net income. The balance sheet would show the company’s assets, liabilities, and equity as of the end of 2022. The cash flow statement would provide a summary of the company’s cash inflows and outflows during the year.
For example, if a company has consistently shown increasing revenue and profitability in its historical financial statements over the past five years, investors might view it as a stable, growing company. However, if the company has experienced significant declines in profitability or a high level of debt, stakeholders may question its financial health.
In another case, a potential investor might review the historical financial statements of a company to assess its risk profile before deciding whether to invest. By looking at trends in past financial performance, the investor can determine whether the company is on a positive trajectory or facing potential challenges.
An example of a historical financial statements clause
Here’s how a clause about historical financial statements might appear in a contract:
“The Company shall provide the Investor with its audited historical financial statements for the last three fiscal years, including the income statement, balance sheet, and cash flow statement, in accordance with generally accepted accounting principles (GAAP).”
Conclusion
Historical financial statements offer a snapshot of a company’s past financial performance and provide essential information for stakeholders to evaluate its financial health. These statements are vital tools for making informed investment decisions, assessing risks, and developing strategic plans. By reviewing historical financial statements, businesses and investors can gain valuable insights into trends, profitability, and overall financial stability, helping them make more accurate projections and decisions for the future.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.