Financial Statements are called the official documents that declare the financial standing of an enterprise, as well as its performance indicators for a particular period of time. These records are structured according to the requirements established by legislation. State-run institutions, accounting officers, companies, and many other entities check final accounts in order to verify accuracy, along with various economic data.
Essence of Financial Statements
Financial Statements are applied by funds providers, so as to review firm’s activities and forecast a future development course.This document is considered as the most reliable marker of the company’s performance for the year. It evaluates a potential benefit that could be gained by the enterprise, as well as fluctuations of its stock price.
Every country usually has its own organizations that must account for these reports. We’ll list the most common ones.
Subjects, that are liable to make Financial Statements, are:
- Non-credit financial institutions;
- Insurance companies;
- Banking institutions;
- Non-governmental pension funds.
Types of Financial Statements
There exist three major divisions of financial statements. From the perspective of a settlement period, the types can be grouped into annual or intermediate. These forms are presented below with its major features.
Balance Sheet. Presupposes review of firm’s assets, obligations and joint stock. In other words, it’s a form of financial reporting that reveals the features of the enterprise’s property (asset) and financial (liability) state in monetary terms. The snapshot reflects a cut-off date of the reporting period.
Balance sheet items consist of:
- Owner’s equity (total assets of an enterprise by deducting joint liabilities), adding cash reserve.
- Resources, including inventory, receivable accounts, along with cash and cash equivalents (easily convertible assets).
- Liabilities, comprising debt (even extending far into the future), dividend payment, along with net wages.
Income Statement. Implies periodic intervals: a year - for an annual financial statement, or a quarter - for a quarterly financial statement. It presents the data on income and expenses, along with financial performance, introduced with an accrual method from the turn of the year to the accounting date. As opposed to the balance sheet, which is a direct current characteristic, the income statement reflects the dynamics of the business process.
Income Statements provide the following data:
- Revenue, taking into account an operating profit and unrelated business income. The first means a financial return from the firm’s selling of goods and services. Its formation takes place due to the firm’s major activity. The second one anticipates earnings received from non-core operations. It goes beyond a major feature of enterprise’s commercial activities. And last but not least, there are other revenues, related to selling long-term assets, for instance, transport facilities, land, or affiliated companies.
- Expenses, emerging from the core activity of an enterprise. The indicator comprises cost of goods sold (COGS), depreciation and amortization, conducting of research and development, as well as total expenditures (for example, salaries, utilities, etc.). Of course, there exists minor company activities, such as interests for loans and debts.
Income Statement is considered as one of the most effective instruments, displaying an increase or decrease of selling processes in comparison with several reporting periods.
Cash Flow Statement (CFS). Estimates money intake that the enterprise is able to generate on its operational activity for repaying debts, transaction expenses, and investments. A document serves as a supplement to the income statement and balance sheet. The report provides insight into the firm’s working processes, cash inflow, as well as spending operations. It demonstrates whether a company possesses good financial health or not.
A definite formula of accounting financial resources doesn’t exist. That’s why Cash Flow Statement discloses three following aspects:
- Operating activities implicate all sources and funds from business dealing. Monetary means comprises every variability made in accounts payable, cash, accounts receivable, inventories. All money transactions are involved, for instance, salaries, income tax duties, interest charges, rent, etc.
- Investing activities mean financial facilities from enterprise’s input operations in its long-run health. In other words, buying and selling of assets, monetary liabilities with merger and takeover, as well as loans to suppliers can be a part of the process.
- Financing activities represent funds from investors or banks, and disposition of money that was paid to stockholders. It signifies issuance of debts, shares buyback, dividends payout, redemption of a debt, and loans.
Limits of Financial Statements
Regardless of the fact that Financial Statements disclose an array of data concerning enterprise operations, the investment community interprets the results in various manners. Certain individuals prefer pouring cash into long-term assets, others, on the contrary, are in favor of share buyback. Or the enterprise’s debt sits well for a particular category of investors, while the rest are concerned about the debt value.
For the above-mentioned case, it’s advisable to make a parallel between several periods, to decide whether there exists distinctive tendencies.
Advantages of Financial Statements
Financial statements, taking into account the purchasing power of the currency at the reporting date, have several important advantages.
First of all, financial statements contain information comparable over time for management, shareholders and other users. It demonstrates the results of operations, the amount of capital and the main development trends.
Moreover, it allows senior officials to make more informed investment decisions, as financial statements more accurately reflect the enterprise’s health. These documents are also useful for foreign investors, as it provides a higher level of comparability with data from other firms operating in the same industry.