If you’re a business owner and you’re filing your annual income tax, you might be required to attach a financial statement to your income tax return. Likewise, if you are applying for a business loan in your local bank, you will also be required to submit your financial statements. If it’s your first time to do these things, you might be wondering what a financial statement is and what is it for? So what are financial statements? A financial statement (or sometimes called financial report) is a formal and summarized record of the financial activities of a business, person or other entity. Financial statements indicate the financial condition, performance and other economic information of an entity. It is in these reports where you can see how a business is doing. It is doing fine or not? Is the business stable or not? Does it have an adequate capital or not? Is the business earning profit or is it losing? Is it making money? These are only some of the general questions which can be answered by analyzing a financial statement.
Preparers and users of financial statements
Financial statements are usually prepared by accountants and other professionals who are knowledgeable in financial accounting. They are the end-product of accounting which starts from identifying economic transactions, to bookkeeping, until the reporting of those economic information in a form of a financial statement. A financial statement is like a picture that tells how a business is doing and where it is going. Thus, there are many interested users of a financial statement. Among them are business owners, investors, creditors, regulatory government agencies, and other interested parties, such as employees and customers. Business owners or managers evaluate financial statements to make the best business decisions. Investors analyze them to determine the stability and profitability of a company to protect their investments. Creditors look at them to investigate the liquidity, solvency and the capacity of the borrower to repay and settle its obligations. Government agencies, such as the taxing authority examine a taxpayer’s financial statements if its correct tax obligations have been remitted to the government.
General purpose financial statements
International Accounting Standard IAS 1 (issued by the IASB [International Accounting Standards Board]) defines general purpose financial statement as those that are intended to serve users who are not in a position to require financial reports tailored to their particular information needs. The objective of these financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity’s assets, liabilities, equity, income and expenses (including gains and losses), contributions by and distributions to owners, and cash flows. That information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty.
Components of financial statements
A complete set of financial statements include a statement of financial position (balance sheet), astatement of comprehensive income (or an income statement and a statement of comprehensive income), a statement of changes in equity, a statement of cash flows, and notes to financial statements. A statement of financial position indicates the financial condition of an entity, while a statement of income indicates it financial performance. The statement of cash flows shows the entity’s cash flows from operating, investing and financial activities. The statement of changes in equity shows the company’s composition of equity and how it changed over the period reported. Further, the notes to financial statements are an integral component of financial statements which comprise a summary of accounting policies and other explanatory notes. Financial statements must be presented fairly. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the accounting framework [IAS 1.15].
For further discussions about the components of financial statements, namely statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes to financial statements, please visit their corresponding links.