What are the financial statements and their types?
Financial statements are a key tool for managing your business. It is a snapshot of your company's finances and provides important information about your business performance. It is also the basis for planning your future role. Financial statements are also used by bankers, investors and others to assess the health and liquidity of your business and to make decisions that affect it.
What are financial statements?
Financial statements are a set of documents that show the financial position of your company at a specific time. It includes basic data about what your company owns, owes, and how much money it has made and spent.
Financial statements may be prepared for different time frames. The annual financial statements cover the most recent fiscal year of the company. Companies can also prepare interim financial statements on a monthly, quarterly or semi-annual basis.
Interim data sometimes includes fewer components than year-end data. For example, they may lack a cash flow statement and a statement of retained earnings.
Financial statements generally provide information for the most recent and prior period to facilitate comparisons. For example, a financial statement covering the period from January 1 to December 31, 2021, might include data for both that year and the previous year—from January 1 to December 31, 2020.
5 types of financial statements you need to know
There are several important financial statement documents that every business needs. It's not just a matter of compliance or best practices; They are vital tools for staying on top of your personalities. Here are the essential documents you need to know:
1. Income statement
It is arguably the most important. A business needs to keep a close eye on profits and the money flowing in, and that's exactly what the income statement does. An income statement may also be known as a profit and loss statement, which shows your business income and expenses over a specified period. The income statement takes revenue, losses, and expenses into account, so it can show whether your company made a profit or missed its mark.
2. Cash flow statement
The cash flow statement shows how money enters and leaves your business, so you can see what you have available as working capital at a given time. The cash flow statement is necessary to show how quickly you can get cash if you need it, because it doesn't take into account things like raw materials or purchases made -- but not yet paid for -- on credit.
3. The balance sheet
The balance sheet shows three main things: your assets, your liabilities, and your equity. A balance sheet can show the present value of a business for the period it covers. Looking at your balance sheet can help you understand if you can meet your financial obligations.
4. A note on the financial statements
This is a requirement of IFRS (International Financial Reporting Standards) and gives greater context about the information contained in your other financial statement documents. For example, your assets may be listed on the balance sheet, but the note on the financial statements document is where you will explain precisely what those assets are. The information in this document is required to ensure your compliance with standards and regulations.
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