Financial statements are a group of summaries of information regarding an organization’s cash flows, financial position, and financial results. They consist of the cash flow statement, balance sheet, and income statement.
Advantages of Financial Statements
The following are some uses for financial statements:
- To assess a company’s capacity for producing cash as well as the sources and use of that cash.
- To ascertain if a company can pay down its debts.
- To monitor financial outcomes over time to identify any potential problems with profitability.
- Calculate financial ratios from the financial statements that can be used to assess the state of the enterprise.
- Should look into certain commercial transactions’ specifics as described in the disclosures that go along with the statements.
- To serve as the foundation for an annual report that is sent to the business’s shareholders and the wider financial community.
Disadvantages of Financial Statements
The process of publishing financial accounts has a few drawbacks. They may be subject to fraudulent manipulation, tricking investors into thinking the issuing entity has achieved better results than it has. A lender may offer debt to an organization that will not be able to repay it realistically as a result of such manipulation. Another issue is that since financial statements are solely historical, they can be deceptive when used to forecast a company’s future performance. For instance, a company that relies on government contracts can have strong performance for the most recent quarter
The Balance Sheet
The balance sheet is one of the financial statements. As of the report date, it displays an entity’s assets, liabilities, and stockholders’ equity. The amount of all assets must equal the total of all liabilities and equity in this report. Current assets and long-term assets are separated in the asset information on the balance sheet. The liability information is split into current and long-term obligations similarly. The liquidity of a business can be ascertained with the help of this categorization. The total of all current liabilities should ideally be more than the total of all current liabilities, indicating that a company has enough assets to cover its current liabilities. The balance sheet is also used to evaluate the amount of debt to the equity invested in the company.
The Income Statement
Another financial statement is the income statement. It shows the results of an entity’s operations and financial activities for the reporting period. It usually contains the results for either the past month or the past year and may include several periods for comparison purposes. Its general structure is, to begin with, all revenues generated, from which the cost of goods sold is subtracted, and then all selling, general, and administrative expenshttps://finanseiendom.no/es. The result is either a profit or loss, which is net income taxes. This report is used to discern the ability of a business to generate a profit.
Earnings Per Share or EPS
Most income statements include a calculation of earnings per share or EPS. This calculation tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period.
To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the company.
Statement of retained earnings
The statement of retained earnings shows the cumulative earnings of the business after any dividends or distributions to shareholders. As well, this statement, sometimes called a statement of changes in equity, also shows the change in the retained earnings account between the opening and closing periods on each balance sheet.
Operating Activities
The first part of a cash flow statement analyzes a company’s cash flow from net income or losses. For most companies, this section of the cash flow statement reconciles the net income (as shown on the income statement) to the actual cash the company received from or used in its operating activities. To do this, it adjusts net income for any non-cash items (such as adding back depreciation expenses) and adjusts for any cash that was used or provided by other operating assets and liabilities.
Investing Activities
The second part of a cash flow statement shows the cash flow from all investing activities, which generally include purchases or sales of long-term assets, such as property, plant, and equipment, as well as investment securities. If a company buys a piece of machinery, the cash flow statement would reflect this activity as a cash outflow from investing activities because it used cash. If the company decided to sell off some investments from an investment portfolio, the proceeds from the sales would show up as a cash inflow from investing activities because it provided cash.
Financing Activities
The third part of a cash flow statement shows the cash flow from all financing activities. Typical sources of cash flow include cash raised by selling stocks and bonds or borrowing from banks. Likewise, paying back a bank loan would show up as a use of cash flow.
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Review Engagement
A review engagement is a next step up in sophistication. This type of statement usually involves some validation by the accountant. This could include reviewing the companies:
- Accounting practices
- Procedures for recording financial information
- Management controls
- Fraud management
A review engagement may be suitable for mid-sized and more complex businesses. This type of statement may also be required by lenders, investors, other partners, or someone interested in buying the company.
Audited statements
Audited financial statements provide the highest level of assurance of the validity of the information. The accountant may:
- request supporting documents
- review internal controls
- verify the accuracy of numbers
- conduct on-site spot checks
- perform an audit count of inventory
- evaluate accounts receivable
“Audited statements provide validity and involve a deep dive into a company,” Godfrey says. “The accountant makes sure the financials are accurate and correct.”
Audited statements may be suitable for larger businesses and those contemplating a substantial loan or investment.
Internally prepared
Internally prepared statements are prepared by a company without the involvement of an external accounting professional. Interim financial statements are often internally prepared.
The Statement of Cash Flows
The statement of cash flows is the last financial statement. It displays adjustments to an entity’s cash flows during the reporting period. These cash flows are broken down into operating cash flows, investing cash flows, and financing cash flows. The operating activities section of a financial statement often contains the majority of all cash flows.
What is the difference between financial statements and financial reporting?
Financial reporting is the obligation to provide financial documents in specific situations. Financial reporting may be required by:
- Financing partners
- Angel and private investors
- Bonding and insurance companies
- Regulatory agencies and tax authorities
- Rating agencies
- Suppliers
- Unions
- Investment analysts
Reporting requirements may obligate a business to disclose both year-end financial statements and interim documents, such as an interim balance sheet and income statement, aged receivables and payables, and a margin report.
Presentation of the Financial Statements
The financial statements should be formatted in line with one of the main accounting frameworks if a company intends to distribute them to external users (like investors or lenders). These frameworks permit some flexibility in the structure of financial statements, thus reports published by various companies, even those operating in the same sector, are likely to have slightly distinct looks. The correctness and fairness of financial statements that are being distributed to third parties may be confirmed by an audit.
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