Do you know what financial statements are? You may have heard of the balance sheet, income statement or cash flow statement, they are documents that provide information about the company's financial condition and performance, as they are very useful to close out your accounting year and will be used to create a financial diagnosis of your business, from the information collected in collected in the financial statements You will be able to make informed trading decisions and get the facts firsthand about your numbers.
Concept of financial statements
the financial statements are written records that convey the company's business activities and financial performance financial statements are often audited by government agencies, accountants, companies, etc. to ensure accuracy and for tax, finance or investment purposes, Preliminary financial statements for profit include balance sheet, income statement, cash flow statement and statement of changes in equity and non-profit entities use a similar but different set of financial lists.
What is the analysis of financial statements?
Advantages of financial lists
Financial statements are useful for the following reasons:
- to determine the company's ability to generate cash, sources and uses of such funds.
- To determine whether the company has the ability to pay its debts.
- To track financial results on the trend line to identify any profitability problems looming.
- to derive financial ratios from statements that could indicate the status of work.
- to investigate the details of certain business transactions, as described in the accompanying disclosures.
- To be used as the basis for an annual report distributed to the company's investors and the investment community.
- To reveal business activities and investments that bring the greatest return on investment
- To provide information to banks, investors and creditors to convince them to invest in business
- To help executive teams make better strategic decisions, including where and when to invest, and when to retain profits
- To identify trends in the industry and ensure business progress in line with its objectives
Types of financial statements
Financial lists can be divided into five main and important types We will know the importance and function of each type as follows:
1. Balance Sheet
The balance sheet is an essential element of the financial statements. Through the balance sheet, the entity's assets, liabilities and shareholders' rights are presented as of the date of the report. In this report, the total of all assets must correspond to the combined total of all liabilities and property rights, Assets information in the balance sheet is divided into current and long-term assets and, similarly, liability information is divided into ongoing and long-term liabilities This stratification is useful for determining business liquidity, ideally the total of all current assets should exceed the total of all current liabilities which means that the company has sufficient assets to pay its current obligations, The balance sheet is also used to compare debt levels with the amount of equity invested in the company to see if the leverage level is appropriate.
2. Income Statement
Income statement is another important financial statement for your small company that provides users with a picture of the financial performance of the business within a specified period of time, the income statement is also known as the Revenue and Expense Statement, or the Profit and Loss Statement (P&L), a statement of profits showing the company's operating and non-operating revenues and expenses, such as the balance sheet. The information contained in the income statement is used in the analysis of financial statements to calculate financial ratios that provide users with greater insight into the company's financial performance.
Income statement includes:
Income:
Revenue is the money earned from the company's business activities, such as the manufacture and sale of products. This is the so-called business operating income, Revenue can also be generated from other activities not directly related to operating activities.
Expenses:
The amount spent by the company to earn money. Expenses include purchase of materials, cost of goods sold, overhead, employees' wages, administrative and petty expenses such as transportation, stationery, etc.
Cost of goods sold:
This is the cost of whatever is required to make the company's products or services, The cost of goods sold is a basic business account and directly affects the company's profits.
Total Profit:
This is the amount reached after subtracting the cost of the goods sold from the company's total revenue (sales).
Operating income:
Amount reached after deduction of operating expenses such as cost of goods sold, employees' salaries and depreciation, It is, simply put, gross profit minus operating expenses.
3. Cash flow statement
The cash flow statement shows how money enters and leaves your business, so you can see what is available to you as working capital at a given time, A cash flow statement is necessary to show how quickly you can get cash if you need it, as it does not take into account things like raw materials or purchases made - but not yet paid for - on credit.
Cash flow data include:
Operating activities:
Operating activities cover funds, assets and resources used to operate operations and carry out the company's business, Cash from operational activities includes employees' wages, income tax payments, interest payments, overhead, credits, inventory and depreciation.
Investment activities:
Investment activities cover the company's investments in its future, This can include the purchase or sale of property or other assets, loans taken to pursue opportunities, and mergers and acquisitions.
4. Statement of Change in Property Rights
This document shows changes made to your company's capital, retained profits, and accumulated reserves, For the sole trader, it shows changes in equity, For partnership, it also shows changes between both partners' equity, In the case of the company, the statement of change in equity shows how equity equity changes among all shareholders.
5. Annual report
The annual report is a publication that public companies have to publish annually to shareholders to describe their operational and financial conditions, Annual reports often include editing and storytelling in the form of photos, graphs and a message from the CEO to describe the company's activities, standards and achievements, It also provides investors, shareholders and employees with a greater insight into the company's mission and objectives than individual financial statements.
The annual report summarizes the financial statements and contains the company's income statement, balance sheet, cash flow statement, industry insights, management discussion and analysis (MD&A), accounting policies and additional investor information.
The annual report summarizes the financial statements and contains the company's income statement, balance sheet, cash flow statement, industry insights, management discussion and analysis (MD&A), accounting policies and additional investor information.
Conclusion:
The financial statements provide a snapshot of the financial integrity of the company at a given time, giving insight into its performance, operations, cash flow and general conditions. Shareholders need financial statements to make informed decisions about their equity investments, especially when the time comes to vote on the company's affairs.
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Reference:
1. << Understand and evaluate the three major financial statements and their impact on financial modelling >>, fastcompany
2. << Financial statements should be clear and informative >>,thehindubusinessline
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