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Financial Statement: Definition, Functions, and Examples

This article will discuss the meaning of financial statement and examples, functions, benefits and strategies for developing comprehensive reports to make the right decisions.

Financial statement definition

A financial statement is the primary source of financial information for most decision-makers and are the first indicator of how the business is performing. 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, 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 be referred 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 statments

Balance sheet

The balance sheet summarises the company’s position that lists assets, liabilities, and equity (company capital) in a certain period. 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.

This report is used by executives, investors, and analysts, to understand the 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:

Asset

Assets are things owned by a company with a value that can be sold or used 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 exist and have value, such as trademarks and patents.

Obligation

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

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:

Income

Revenue is the income earned by the company 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.

Net income

Represents the total operating income of the business in one period. This value is obtained from the total gross income after deducting the estimated income tax.

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.

Profit before interest & tax

Calculation of company profits from operational activities before having to pay interest or taxes

Loss

Loss is a decrease, which in part refers to the total value of assets in business resources.

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.

Gross profit

Gross profit is the profit earned by a company after deducting the costs associated with making and selling its products or expenses related to providing its services.

Operating costs

Includes all costs associated with running the day-to-day business operations; however, they are not included in the COGS.

Depreciation

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).

Single-step

A single-step income statement provides a simple overview of a company’s income and expenses. 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.

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. This report tracks the cash a business generates in three main ways through 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:

Cash flow from operating activities

This section reports cash flows and outflows that come directly from the company’s main business activities. The company must be able to generate sufficient positive cash flow for operational growth.

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, securities. Generally, cash flows from investing activities are cash outflows because companies make long-term investments for future operations and growth.

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 used 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

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.

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. The components of the idea of changes in the capital are:

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. 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.

Dividend

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. The right software can help you achieve your financial reporting goals without making it difficult for you.

Conclusion

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 Accounting software to achieve easy creation of various types of reports!

Interest in getting savvy tips for improving your business efficiency?

Anatha Ginting
A full-time Content Writer at HashMicro. Strive to develop my writing skill and knowledge in terms of business, technology, and other relevant issues.

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