Basic financial statements are formal records that convey a company’s business and financial performance. They are often audited by accountants or government agencies to ensure their accuracy and for tax, financial or investment purposes.
The set of financial statements usually contains an income statement, a balance sheet, and a cash flow statement. They are also known as financial reports. The company’s information and financial position is presented with a structure so that it is easy to understand.
For large corporations, these statements can be complex. Therefore, they may include a management discussion and analysis, as well as a comprehensive set of footnotes.
These notes describe in more detail each item on the income statement, balance sheet and statement of cash flows. The notes to the financial statements are considered an integral part thereof.
financial information
These statements are prepared to provide more information to users outside the organization, such as creditors and investors, about the financial health of the company.
Publicly traded companies must also submit these statements along with others in a timely manner.
For many managers, managers and investors, financial statements are the main tool for obtaining information about a company’s finances. For this reason, financial accounting attaches great importance to the importance, veracity and accuracy of the information contained therein.
What are worth for?
They are used by investors and lenders to assess an organization’s profit potential and financial situation. They are useful for the following reasons:
– Determine a company’s ability to generate cash.
– Determine whether a company has the ability to pay its debts.
– Track financial results to spot looming profitability issues.
– Generate financial indicators that can show the condition of the business.
– Investigate the details of certain business transactions, described in the notes attached to the statements.
The three main financial statements are the income statement, the balance sheet, and the statement of cash flows.
General balance
It helps to assess the financial health of a company. When analyzed across multiple accounting periods, it is possible to identify underlying trends in the company’s financial position.
It is useful to determine the status of an entity’s liquidity risk, financial risk, credit risk and business risk.
When used in conjunction with competitors’ financial statements, the balance sheet helps identify relationships and trends that are indicative of potential problems or areas for improvement.
Therefore, balance sheet analysis can help predict the amount, timing and volatility of the entity’s future earnings.
Results report
It provides the basis for measuring a company’s performance during an accounting cycle. It can be evaluated in terms of the following:
– Changes in sales revenue over the period and compared to industry growth.
– Changes in gross profit margin, operating profit and net profit for the period.
– Increase or decrease in net profit, operating profit and gross profit during the period.
– Comparison of the company’s profitability with other organizations operating in similar industries or sectors.
Cash flow statement
It provides important information about an organization’s solvency and liquidity, essential for any company’s growth and survival.
By compiling major changes in the financial situation over a period, it helps to distinguish management priorities.
Cash flow data are more objective than the financial benefit presented in the income statement, susceptible to eloquent changes caused by the use of different accounting policies.
The basic financial statements
– General balance
It provides an overview of a company’s assets, liabilities and equity, like a snapshot over time. The date at the top of the balance sheet indicates when this photo was taken.
It records the way in which assets receive funds, with liabilities through bank loans or with capital through retained earnings.
Assets are listed on the balance sheet in order of liquidity. Liabilities, on the other hand, are listed in the order in which they will be paid.
Active
– Cash and cash equivalents are liquid assets.
– Accounts receivable are the amount of money that customers owe the company for the sale of a product or service.
– inventories.
Passive
– Debts, including long-term debts.
– Income, taxes and profits.
– Wages payable.
– Dividends payable.
Patrimony
It is an organization’s total assets minus its total liabilities. It corresponds to the amount of money that the shareholders would receive if all the assets were liquidated and all the debt of the organization were paid.
– Results report
It provides an overview of a company’s expenses, income and profits over a specific period of time.
The main objective is to convey details about the profitability of commercial activities. It can also show whether sales or revenues are increasing compared to other periods.
types of income
Operating income is income received primarily from the sale of products or services. They are generated from an organization’s core business activities.
Non-operating revenues are those received through tasks that do not belong to the main function of the company. Some examples are:
– Income from renting a property.
– Interest earned on money deposited in the bank.
– Income from strategic associations, such as royalty payments.
types of expenses
Primary expenses are those incurred during the process of obtaining revenue from the main business activity.
They contain cost of goods sold, general and administrative expenses. For example, sales commissions, employee salaries, and utilities such as transportation and electricity.
Secondary expenses include losses on machinery liquidation or interest paid on loans.
– Cash flow statement
Assess the extent to which an organization generates cash to fund its operating expenses, pay its debt obligations, and fund investments.
It allows investors to understand how a company’s operations work, where the money comes from and how it is spent. It also provides information on whether a company has a solid financial foundation.
Operational Activities
It contains all the sources and uses of money to manage the company and sell the products or services.
Cash from operations comes from different transactions carried out with inventory, customer collections and cash sales.
They also include wages, tax and interest payments, rents and receipts from suppliers.
investment activities
They are all the sources and uses of money corresponding to a company’s investments in the long-term future.
For example, loans received from banks or given to suppliers, sale or purchase of an asset, or any payment in connection with an acquisition or merger.
financing activities
These are the sources of bank or investor cash as well as the use of cash paid out to shareholders.
For example, debt and equity issuance, bank loans, share repurchases, dividend payments, and debt payments.
How are financial statements calculated?
General balance
The balance sheet is structured so that a company’s total assets equal the sum of liabilities plus equity.
Assets can be financed by internal sources (equity and earnings) or external credit (bank loans, trade creditors, etc.).
Since a company’s total assets must equal the amount of capital invested by the owners and any borrowings, the total assets must equal the sum of equity and liabilities. Balance totals are identified as follows:
– Total assets are placed on the balance sheet for the period.
– All liabilities are totaled, which should be a separate list on the balance sheet.
– Total equity is put in and that number is added to total liabilities.
– Total assets must equal total liabilities plus total equity.
This leads to the balance sheet accounting formula: Assets = (Liabilities + Equity).
Results report
It is mainly dedicated to the expenses and income of an organization for a defined period. After expenses are subtracted from income, the state generates the amount of an organization’s earnings, called net income.
Prior period financial information is presented alongside current period financial results to facilitate comparison of performance over a period.
For example, if an organization is preparing the income statement for the six months ended December 31, 2018, the comparative figures for the prior period must relate to the six months ended December 31, 2017. results are identified as follows:
– Total of all revenues or sales for the period.
– Total of all expenses and operating costs of the business.
– Total expenses from revenue are subtracted to obtain revenue or net profit for the period.
The general income statement accounting formula is: Net income = total income – total expense.
Cash flow statement
There is no formula for calculating a cash flow statement, but it does contain three sections that report cash flow for the various activities on which a company has used its cash.
