Financial Statements represent a formal record of the financial transactions of an entity. These are company’s reports that quantify the financial strength, performance and liquidity of a company. Financial statements is required to be audited by Chartered Accountants Firms, Government Agencies like CAG etc. to ensure accuracy and for tax, financing, or investing purposes. Financial statements mainly include: –
- Balance sheet
- Income statement
- Notes to Accounts
- Cash flow statement
- Statement of Changes in Equity
- Financial statements are written reports that convey the business financial activities and the financial performance of a company.
- Balance sheet provides an overview of assets, liabilities, and stockholders’ equity as a summary snapshot as on particular date.
- Income statement primarily focuses on a company’s operating revenues and expenses during a particular period normally one year. Then expenses are subtracted from revenues (Income), the statement produces a company’s profit figure called net income.
- Cash flow statement (CFS) measures how well a company generates liquid cash to pay its debt obligations, fund its operating expenses, and fund investments.
Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a particular date. It is comprised of the following three elements:
- Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery, Building etc)
- Liabilities: Something a business owes to someone (e.g. creditors, bank or Financial Institutions loans, etc)
- Equity: What the company owes to its owners. This represents the amount of capital that remains in the business after its assets are used to pay off its outstanding liabilities. Equity therefore represents the difference between the Total assets and liabilities.
Income Statement, also known as the Profit and Loss Statement, reflects the company’s financial performance in terms of net profit or net loss over a specified period of time. Income Statement is composed of the following two elements:
- Income: What the business has earned over a period (e.g. Product / Services revenue, Interest/ Dividend income, etc)
- Expense: The cost incurred by the business over a period to earn revenue (e.g. Purchase of Products/ Services, Salaries and Wages, Depreciation, Building Rent, Interest Expense etc)
- Net profit = Income – Expense
Notes to Accounts
Notes to financial statements, footnotes, notes to accounts are supporting information that is usually provided along with a company’s financial statements. Many such notes are required to be provided by law, including details related to Significant Accounting Policies, provisions, reserves, depreciation, investments, inventory, share capital, employee benefits, contingencies, etc.
More information supplied along with the financial statements may be a product of the accounting standards being applied on the business. Notes to accounts help users to understand the current financial position of a company and act as a support for its estimated future business performance.
Notes to accounts act as supplementary information furnished along with the final accounts of a company and may be tremendous in size depending on the company, accounting framework and nature of the business. The information supplied depends on the accounting standards applied such as Ind AS or IFRS.
Cash Flow Statement
Cash Flow Statement, presents the movement in cash and bank balances of a company over a period. The movement in cash flows is classified into the following segments:
- Operating Activities: It represents the cash flow from primary activities of a business like purchase, sales, operating income & expense.
- Investing Activities: It represents cash flow from the purchase and sale of assets other than inventories (e.g. purchase of a factory plant)
- Financing Activities: It represents cash flow generated or spent on raising and repaying share capital and loan together with the payments of interest and dividends.
Statement of Changes in Equity
Also known as the Statement of Retained Earnings, provide detailed movement in owners’ equity over a period. The movement in owners’ equity is derived from the following components:
- Net Profit or loss during the period as reported in the income statement
- Share capital issued or repaid during the period
- Dividend payments
- Gains or losses recognized directly in equity (e.g. revaluation surpluses)
- Effects of a change in accounting policy or correction of accounting error
Use of Financial Statements
Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about its future direction of the company’s share price. One of the most important resources of reliable and audited financial data is the company’s annual report, which contains the firm’s financial statements.
The financial statements are used by investors, market analysts, and creditors to evaluate a company’s financial health and earnings potential.