What is a Financial Statements &  Major Financial Statement Reports

Financial Statements:  Major Financial Statement Reports | Finanze.biz

 

Financial statements help’s you analyze your company’s financial position and performance. They are made up of four major components, the most important of which are the balance sheet and the income statement. When reviewing a set of financial statements, the first thing to consider is whether they are external financial statements or internal financial statements.

Financial data is used by investors and financial analysts to examine a company’s performance and make forecasts about the stock price’s future direction. The annual report, which covers the firm’s financial statements, is one of the most essential sources of trustworthy and audited financial data.

What are Financial Statements?

Financial statements are a collection of summary-level reports about an organization’s financial results, financial position, and cash flows. They include the income statement, balance sheet, and statement of cash flows.

Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Financial statements include the; Balance sheet, Income statement, Cash flow statement.

External financial statements

External financial statements are produced for the purpose of external reporting. They’re for investors, tax authorities, and other important partners who need financial data. External financial statements are usually issued once a year, however they can also be published periodically in specific situations (such as for public corporations). External financial statements are usually based on Generally Accepted Accounting Principles (GAAP), which has particular rules that must be met to ensure comparability and consistency.

Internal financial statements

Internal financial statements are more flexible and have a stronger analytical component than external financial statements. They may be organized by division, contain more information, or be produced more frequently (weekly, monthly or quarterly).

 Major Financial Statement Reports

Balance sheet

The balance sheet is the most important declaration in terms of “what we have.” The balance sheet indicates what the business possesses (cash, accounts receivable, and equipment) as well as what it owes (liabilities such as accounts payable and loans). Any residual difference between these two figures (assets and liabilities) represents the equity stake of the owners. These three figures should always be in proportion (see the fundamental accounting equation). The balance sheet depicts the state of the company at a certain point in time.

Below is the breakdown of the list of things found on a balance sheet ;.

Assets

  • Cash and cash equivalents, such as Treasury bills and certificates of deposit, are liquid assets.
  • The amount of money owing to the company by its customers for the sale of its product and service is known as accounts receivables.
  • Inventory

Liabilities

  • Debt including long-term debt
  • Wages payable
  • Dividends payable

Shareholders’ Equity

  • A company’s total assets minus its total liabilities equals its shareholders’ equity. The amount of money that would be returned to shareholders if all of the company’s assets were liquidated and all of the debt was paid off is known as shareholders’ equity.
  • The amount of net earnings that was not distributed to shareholders as dividends is known as retained earnings, and it is a component of shareholders’ equity.

Income Statement

The income statement answers the question, “What did we do?” The income statement, often known as the profit and loss statement, displays how the company performed over a set period of time. It gathers data over a period of time (typically annually, monthly or quarterly). Revenue and costs are two important components of the income statement. These figures add up to the net income (or loss).

Statement of Cash Flows.

The statement of cash flows is the final financial statement. It depicts the variations in an entity’s cash flows over the course of a reporting period. These cash flows are broken down into three categories: operational cash flows, investing cash flows, and financing cash flows.

The majority of all cash flows are presented in the operating activities section, which shows the cash inflows and outflows associated with the business’s basic operations, such as changes in receivables, inventory, and payables balances.

The cash flows from the purchase or sale of investment instruments, assets, or other enterprises are recorded in the investing activities section. Cash flows connected to debt acquisition or paydown, dividend issuances, stock sales, and other financing operations are included in the financial activities section.

 

Advantages of Financial Statements

Financial Statements are useful for the following reasons:

  • To determine the ability of a business to generate cash, and the sources and uses of that cash.

  • To determine whether a business has the capability to pay back its debts.

  • To track financial results on a trend line to spot any looming profitability issues.

  • To derive financial ratios from the statements that can indicate the condition of the business.

  • To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.

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