Understanding financial statements is a vital part of accounting in any business setting, regardless of whether you are a new start-up owner or a seasoned executive with decades of experience under your belt.
It is also very important that investors understand financial statement analysis, so that they can come to terms with how a company is performing.
We will now give you the low down on everything there is to know about financial statements, including creating, reading, and analysing them.
What are financial statements?
The important thing to note here is that this can refer to a few different company accounts. As there are multiple types of financial statement, some will give you useful information on profits and losses, whereas others will inform you on cash flow and expenses. A common example of a financial statement would be a company balance sheet.
These statements are normally developed monthly or quarterly, though more high-volume business ventures may require updates on a weekly basis. Others may even compile an annual report. The time span will change from company to company, due to the unique nature and differing needs of business ventures.
Financial statements will normally be generated by a company’s bookkeeper or accountant. It is increasingly common these days that accounting software is utilised to automatically generate important financial statements.
Types of financial statements
There are a number of different types of finance statements dependent on financial recording. Certain companies will need more detailed records than others for accounting and tax filling purposes.
Companies House and HMRC suggest that businesses keep the following company financial statements:
Cash Flow Statement
As a business earns and spends money, cash flows in and out of company accounts, during the normal course of business operations. Standard financial statements only measure profit and loss and records revenue as sales are made, but the cash flow statement can be used with the actual method of accounting.
As you analyse any cash flow statements, you will notice that they are broken down into three separate categories.
Operating activities describe how much money is coming in from regular business operations, such as the sales of products and services. It also shows how much cash is leaving the business due to everyday operations.
Investing activities show the amount of money the business is spending on new equipment, machinery, technology, or other items needed to boost growth.
Financing activities show incoming and outgoing cash flow related to investment activities. These can include the selling of stock (incoming) or taking out a loan (outgoing).
Each of these inflows and outflows are moulded together to determine whether cash flow is currently positive or negative. This is handy for investors, who can see how a business is performing and check up on the financial status of it.
Profit and loss statement
Next, we have the profit and loss statement. As its name proposes, this assertion shows you how much cash your business has procured, and how you’ve spent it during the bookkeeping time frame being referred to. There are two principal segments to the benefit and misfortune explanation:
Total Revenue: Total income, or charged pay, shows you both invoiced deals just as the expense of products sold (COGS), which is deducted from sales to show up at your complete benefit.
Total Expenses: This segment shows any extra costs not canvassed in the COGS.
The profit and loss statement additionally tracks significant variables like depreciation and amortisation, which show how resources have declined in esteem over the long run.
By following pay and costs, you’re ready to see which sorts of costs most affect your business income. You’ll likewise require this data for documenting charges with HMRC. According to a venture viewpoint, a budget report examination dependent on benefit and misfortune can assist with uncovering how reasonable a plan of action is.
Balance sheet
A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time. Assets are everything the company owns, including cash, investments, property and equipment. Liabilities are everything the company owes, including debt and accounts payable.
Shareholders’ equity is the portion of the business owned by the shareholders. The balance sheet can be used to assess a company’s financial strength and stability. It can also be used to assess the value of a company’s assets and liabilities. The balance sheet is an important financial statement for businesses of all sizes.
Statement of changes in equity
A statement of changes in equity is a financial statement that shows the changes in a company’s shareholders’ equity over time. This statement can be prepared using either the direct or indirect method. Under the direct method, all items that affect equity are listed separately and in detail.
Under the indirect method, only net income and dividends paid are used to calculate equity. The statement of changes in equity is important because it provides information about how a company is financed and how it uses its resources. It can also be used to assess a company’s financial health.
For example, if a company consistently has negative equity, it may be insolvent. Conversely, if a company has positive equity, it indicates that the company is generating funds internally and is financially sound. The statement of changes in equity can also be used to assess management’s performance. For instance, if management is able to generate positive equity despite difficult economic conditions, it may be indicative of good decision-making.
Asset report
To wrap things up, the asset report is one of the main working archives in bookkeeping, giving a simple depiction of your business’ remaining initially. You ought to have the option to follow and oversee obligations, oversee monetary standing, and record charges utilising data produced during past bookkeeping periods.
The monetary record comprises of three parts:
Assets: Money that the business needs to work with
Liabilities: Money that the business owes
Equity: The cash put resources into the business
Together, these three parts ought to consistently be in balance as indicated by the bookkeeping condition:
Resources = Equity – Liability
Resources incorporate both fixed resources, similar to property and vehicles, just as current resources, similar to money and stock. Liabilities can likewise be short and long haul in nature. With the asset report, you can play out a budget summary investigation like working out the business’ liquidity proportion:
Liquidity Ratio = Current Assets/Current Liabilities
In the event that the liquidity proportion is under 1, this implies the business may experience issues taking care of its present liabilities.
In summary
As you should be able to clearly see by now, all financial statements reveal insights into how well a business is performing and managing its money. Each of these statement types provide business owners with a vital resource that can lead to further investment interest.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.