Financial statements are the official documentation of the financial activity and financial position of a company or individual entity. The relevant financial data is provided in a systematic manner and in a manner that is easy to comprehend. The financial statements are essential for every business. Since they show an accurate and honest picture of how the business’s finances has performed during the most recent financial period as well as the actual financial condition of the business. All organizations, nonprofit or profit-making that is involved in financial transactions should prepare these statements. The format of these statements may differ. These statements form an essential element of the annual report for any business. Management staff, employees and shareholders, investors major suppliers, large customers and stock exchanges, as well as authorities of the government, and others who have a stake in the business utilize these financial statements.
Types of Financial Statements
There are generally three kinds of financial reports. However, two additional important parts that comprise the annual report can also be classified as financial statements. In general, financial statements come in five kinds:
- Balance Sheet
- Income Statement
- Statement of Cash flow
- Statement of Change in Equity
- Notes to Financial Statements
Each type are explained in the following paragraphs:
Balance Sheet
Statement of financial situation is another form of the balance sheet. It is because you can determine your net worth for an company by removing all liabilities from the total assets. It is a record of the balances of assets shareholders’ equity and liabilities at the time of reporting.
The balance sheet’s accounting equation reads Asset = Liabilities x Shareholders” Equity
Therefore, the balance sheet’s three major components are:
- Assets
- Liabilities and
- Shareholders’ Equity
These components are briefly described in the following paragraphs:
Assets:
Resources legally and economically owned of the entity are referred to as assets. For instance the land, buildings vehicles, money, and even cars are all assets owned by any company. Assets can also be of two kinds that are: Short-term or Current Assets, and Fixed or Non-Current Assets.
Current assets include money in the bank, work in progress prepayments, raw materials, products that are finished and are able to be utilized and converted within 12 months from the time of the report Importance of financial statements to an investor.
Non-Current Fixed Assets or Fixed Assets can be classified as the categories of tangible as well as intangible. The tangible fixed assets comprise equipment, land and building investments, and other investments that are expected to be used up and converted within more than twelve months from the time of the report. Intangible fixed assets are goodwill, investment, patents trademarks, as well as investment.
Liabilities
The obligations that an company owes to another or individual are referred to as liabilities. Examples include the bank loan, credit purchase as well as overdrafts, tax due and interest due. Also, liabilities are classified in two types: Short-term or Current liabilities and non-current or long-term liabilities.
The obligation due within one year. For instance, the purchasing any item purchased on credit within the period of five months could be recorded as a current or current obligation. A debt that is due within a time that is longer than twelve months or a year. For example the long-term lease that is due in 3 years could be classified as a non-current or long-term obligation Family Office Singapore.
Equity of shareholders is different from liabilities and assets. The things that make up equity include shares capital, retained earnings as well as the accrual of income other than share capital preferred stock along with common stock. The change in the assets and liabilities over a time will impact the equity’s net worth. The equity’s net value could be determined by subtracting liabilities from assets.
Income Statement
An income statement can be described as a financial report of a company that provides three fundamental financial data of the business during a specified time. This includes the amount of revenue, expenses, and profits or losses for the period. The statement of financial performance (SFP) is the other form of income statement. Since it allows users to measure the financial performance of an entity by using this report over time and also compare it with counterparts.
Three major components that make up the earnings statement can be explained in the following paragraphs:
1. Revenues:
The sale of services or goods that an entity sells in a certain accounting period is known as revenues. A company can be able to declare its earnings in cash or one basis called accrual. You will be able to know the net sales the business made in the period of time covered from this section.
On the Income Statement, revenue are typically reported as a summary. You must check the notes included with the income statement for specifics. It is possible to find the various revenue streams that the company generated over the time in the notes. It is also possible to understand the significance, the increase and decline of different sources of revenue.
2. Expenses:
Operating costs that are incurred by the business for a particular accounting period. Depreciation, salary expenses and transportation costs, as well as utilities, training costs expense, interest, and tax costs are all types of operating costs. They also include the cost of providing services and the items sold during the time. However, the expenses of the items sold and general administration expenses will be reported in different ways.
3. Profit or Loss:
When you subtract the costs from the generated revenue and you make a profit or lose money. If the revenue generated is more than the expenses, you will earn a profit. However, if expenses exceed revenues, it is loss. Profit or loss is reported into the report of changes in the balance sheet and equity.
Statement of Cash Flow
The financial statements are the ones that reveals the cash flow of an entity over an exact time. The statement is divided into three parts that include cash flow from 1. operation, 2. investment, and 3. financing operations.
There are many factors that result in cash balances to be totally different. These include adjustments that are not cash-based on net income and investments. They also include variations to working capital levels, dividends capital outflows and capital inflows.
Statement of Change in Equity
The financial statement reveals the movement of equity in relation to shareholders’ contributions and the the equity’s balance at the end of any time during the accounting period. The statement contains the shares capital total and share capital’s classification retained earnings, as well as other dividends and state reserves. The Statement of Change to Equity is the result of the balance sheets as well as income statement. If these 2 financial reports are properly prepared the statement will be accurate.
Notes to Financial Statements
The notes to the financial statement are vital financial statements that a lot people do not know. International Financial Reporting Standards (IFRS) has created a legal obligation that businesses divulge all details related to financial statements in order to improve the understanding by the user. For instance, you can discover the fixed asset’s balance on the balance sheet. However, the specifics will be found in the notes on those with fixed assets.
