What is the purpose of financial statements in the investment process?

Financial statements provide investors with insight into the financial performance of an entity. The primary purpose of financial statements in the investment process is to give investors the information necessary to make informed decisions about investing. They provide investors with the means to analyze financial results over time and compare the performance of a company to others in the same industry. Financial statements include the income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity. The income statement shows the company’s revenues, expenses, and net income or loss over a period of time. The balance sheet provides information on a company’s assets, liabilities, and owners’ equity. The statement of cash flows outlines a company’s sources of cash and the purposes for which cash is used. Lastly, the statement of stockholders’ equity includes changes in the ownership of a company’s common and preferred stock. These financial statements help investors determine the fluctuations in business performance and in turn, the potential return or risk associated with their investments. Investors need to understand and assess a company’s financial position before investing their money in it. Thus, examining financial statements is a key component of the investment process.

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What is the purpose of financial statements in the investment process?

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