A company’s financing position is important in many parts of its business, hence the many use of integrated financial software. As a result, accounting and financial management are interconnected. One way to know about the company’s financing position is through its financial statement. To know about the financial condition across all departments, companies often utilize the help of a good accounting system. This article will discuss the meaning of a financial statement, functions, benefits, and strategies for developing comprehensive reports to make the right decisions.
The best accounting system is the one that fits your company’s needs the most. This system should minimize manual work and data errors that will lead to boosting your efficiency. Moreover, you can also adopt an online accounting system to get complete and real-time access to your financial data. If you are interested in implementing one, don’t forget to find out about the pricing scheme calculation beforehand.
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Financial statement definition
A financial statement is the primary source of financial information for most decision-makers and is the first indicator of how the business is performing. However, reading this report will give you a comprehensive picture of the state of the industry and if there is a risk of possible problems in the future.
Benefits of financial statement
Help decision making
Financial statements consist of valuable financial data and company information that helps in decision making. The proper analysis helps the company in identifying the company’s weaknesses and strengths. Therefore, this document can company’s refer to as the basis for stakeholders in making decisions related to business operations.
Assist with report generation
The financial statements include an income statement, a balance sheet that represents the company’s historical financial performance during the period. You can use this financial information to report to shareholders, creditors, managers, and other stakeholders to know the company’s financial condition.
Help in forecasting
This document also has a vital role in providing forecasts for future financial actions. Companies prepare financial statements to give estimates of future expenses, income, investments, and financing.
Example of financial statements
The balance sheet summarises the company’s position that lists assets, liabilities, and equity (company capital) in a certain period. However, In simple terms, here is a summary of what the balance sheet shows:
ASSETS = LIABILITIES + EQUITY
The equation shows that a healthy company’s assets must be balanced with the company’s liabilities and capital.
These reports are what executives, investors, and analysts use to understand financial health. It is generally used in conjunction with two other types of financial statements, namely the income statement and cash flow statement. Elements in this report include:
Assets are things that a company’s values can use to make products or provide services that can generate income. Assets include property, such as plants, trucks, equipment, and inventory. It also includes abstract (untouchable) but still exists and has value, such as trademarks and patents.
The next section of the balance sheet lists the company’s liabilities and the money you owe others, including regular expenses and loan payments. It is divided into two types: current liabilities targeted to be paid off within a year and long-term liabilities with maturities of more than one year.
Current liabilities include rent, utilities, taxes, current payments against long-term debt, interest payments, and salaries. Meanwhile, long-term liabilities include long-term loans, deferred income tax, and pension fund liabilities.
Capital or equity generally consists of the amount of money generated by the business and owner and shareholder funds.
The balance sheet shows the company’s assets, liabilities, and equity in detail at the end of the reporting period. It does not show the inflows and outflows of the account during the period. The balance sheet has two forms, namely:
- Staffel Form (Report Form)
This report presents asset, liability, and equity accounts in a vertical format. Sequentially from top to bottom, starting from the group of assets (assets) to the group of debt and capital is located at the very bottom.
- Scranton Form (Account Form)
This form is also known as a T-shape balance, presented in a horizontal format, with information in two columns next to each other. The left column lists assets (assets), while the right column lists liabilities (liabilities and equity). The last row in each column lists the total value of all assets and liabilities and equity.
Income Statement (Income Statement)
An income statement is a report that shows how much revenue a company earned over a certain period, usually over a year or a specific period of the year. The income statement also shows the costs and expenses associated with the acquisition of that income. The calculation is done by subtracting all expenses from all payments.
An income statement helps businesses decide whether they can profit by increasing revenue, reducing costs, or both. Companies can also use this document to see the effectiveness of the strategies they implement at the beginning of the financial period. Some of the elements in the income statement are:
Firstly, revenue is the income that a company earns from the sale of goods or services or other activities related to the company’s primary business operations. Revenue is the first element of the income statement, which is always on top.
2. Net income
Represents the total operating income of the business in one period. This value is the company obtained from the total gross income after deducting the estimated income tax.
3. Profit before tax
Calculate the company’s profitability before the income tax element is included. This is the amount of money left after all expenses have been deducted from revenue.
4. Profit before interest & tax
Calculation of company profits from operational activities before having to pay interest or taxes
Loss is a decrease, which in part refers to the total value of assets in business resources.
6. Cost of goods sold
The cost of goods sold is the cost of goods or services directly related to the goods or services of the business. These expenses are recorded in the section after income to calculate gross profit.
7. Gross profit
Gross profit is the profit that a company earns after deducting the costs associated with making and selling its products or expenses related to providing its services.
8. Operating costs
Includes all costs associated with running the day-to-day business operations; however, they are not included in the COGS.
Depreciation is a procedure for reducing the cost of an asset over the period in which the business expects to benefit from the use. There are two ways to make an income statement: direct (single step) and gradual (multiple-step).
A single-step income statement provides a simple overview of a company’s income and expenses. However, This direct document includes only the subtotals for the company’s revenues, costs, and net income.
- Multiple steps
This report details the profit or loss of the business in a certain period. Thus offering an in-depth analysis of the financial performance of the business. Separate operating income and operating expenses of the company from non-operating income and non-operating expenses.
10. Cash flow statement
A cash flow statement is a report that provides data on all cash inflows that the company receives from ongoing operations and external investment sources. It also includes all cash outflows used to pay for business activities and investments during a given period.
The company’s financial statements provide investors and analysts with an overview of all transactions that occur in the business. However, This report tracks the cash a business generates in three main ways operations, investments, and financing. Also, it measures how well a company manages its cash position, such as developing cash to pay debt obligations and fund operating costs. The components of the cash flow statement include:
11. Cash flow from operating activities
This section reports cash flows and outflows that come directly from the company’s main business activities. However, The company must be able to generate sufficient positive cash flow for operational growth.
12. Cash flow from investing activities
Includes cash outflows for long-term assets such as land, buildings, equipment, and inflows from the sale of assets, businesses, and securities. Generally, cash flows from investing activities are cash outflows because companies make long-term investments for future operations and growth.
13. Cash flow from financing activities
Provides an overview of the cash used in business financing. It measures cash flows between a company and its owners and creditors, and the source is usually debt or equity.
This cash flow is generally company use to determine how much money the company has paid out through dividends or share repurchases. It is also helpful to help determine how the company obtains cash for operational growth. There are two methods used to calculate cash flows from operating activities, namely:
- Direct method
Therefore, this method uses the actual cash inflows and outflows from the company’s operations, starting the calculation with the amount of cash your business receives and pays.
- Indirect method
This method shows the relationship between the financial statements of income, balance sheet, and cash flow. The calculation starts with net income, which is then converted into operating cash flow.
14. Statement of changes in capital
It has the primary objective to provide details of all movements in equity during the accounting period, which are not available elsewhere in the financial statements. Thus, it helps shareholders and investors in making more informed decisions about their investments. This report also enables analysts and other readers of financial statements to understand what factors lead to changes in equity capital. Mentioned below are the critical components of the statement of changes in equity:
- Initial capital
Represents the stability of shareholders’ equity assets from the beginning of the reporting period, as reflected in the financial statements of the previous period.
- Effect of accounting policies
When there is a change in accounting policy retrospectively, it is essential to make adjustments in shareholder reserves at the beginning of the reporting period. However, It aims to reaffirm primary equity at the amount that would have been achieved had a different accounting strategy been employed.
- Profit and loss in the related period
Indicates the gain or loss marked by the shareholder over some time as stated in the income statement.
Payments or announcements of dividends in the current period must be deducted from the shareholders’ equity as a distribution of the wealth of each shareholder.
- Ending balance
This is the stockholders’ equity reserve balance at the end of the accounting period.
Notes to financial statements
Technically, there are only four types of financial statements for business entities. The fifth category is Notes to Financial Statements, or Footnotes included in other types of financial statements. While these records are not mandatory, they are informative and essential documents covering significant accounting policies and practices, income taxes, employee retirement plans, and stock options.
You can consider footnotes as a type of financial statement or additional information to supplement financial statements. Footnotes help in explaining how financial statements are prepared, particularly to investors.
Strategy for compiling comprehensive financial statements
What if the report you need to create becomes quite complex? This is where Accounting Software comes in as a tool to simplify recording a company’s cash flow and check the overall financial condition. However, The right software can help you achieve your financial reporting goals without making it difficult for you. If you are still deciding on which software to implement, you can compare and find out the pricing scheme calculation to help you decide.
As you can see, these statement statements all have an essential role to play. Separately, each type of financial report provides a different picture of a company’s economic reality at a given point in time.
Together, these reports provide a complete overview of the company’s financial position during the relevant reporting period. In terms of financial soundness, monitoring, reporting, control, transparency, and all other aspects of accounting, these statements and the information they provide are essential and invaluable. Use HashMicro’s Accounting software to achieve easy creation of various types of reports!