A government agency, an accountant, a business, an investor, or anyone else can ask for an audit of a financial statement to make sure it is correct and meets the needs of a tax, loan, or investment. However, in this article, I will take you through on all you need to know about financial statement analysis, its examples, and the types of financial statements.
What Is Financial Statement?
Financial statements are written documents that represent a company’s commercial activities as well as its financial performance over a given period. Audits of financial accounts are frequently conducted by government agencies, accounting firms, and other organizations. This is done with the objectives of ensuring their accuracy and meeting the requirements for taxation, funding or investing.
Subsequently, most businesses that are run to make money use the cash flow statement, the income statement, and the statement of changes in equity as their main financial statements. Organizations that are not-for-profit make use of a collection of accounting records that are comparable but distinct.
Financial Statements Examples
The following examples of financial statements offer a basic framework for the four most frequent types of financial statements. There are many of organizations like this, however, it would be difficult to provide various examples of financial statements for every possible variation. However, each of the examples of financial statements discusses the issue, why it is relevant, and any further commentary. They include:
#1. Cash Flow Statement Example
This is one of the examples of financial statements. Here, the statement of cash flows is the first example we will look at regarding financial statements. Cash flow statements reflect a company’s cash position across an accounting period. In addition, net income from the income statement is transferred to the cash flow statement and adjusted for unpaid costs. This is done to calculate how much money changed hands throughout the period.
#2. Income Statement Example
The income statement makes up the second part of an organization’s financial statements. It provides information regarding the financial accomplishments of the business over some time. It contributes to the amount of income and profit that the company makes. The income statement summarizes a company’s financial activity over a specific time frame, typically a quarterly half or even a year. Also, income statement data includes revenue, selling price, operational cost, and miscellaneous expenditures.
#3. Balance Sheet Example
This is also one of the examples of financial statements. The balance sheet shows the corporation’s current assets, liabilities, and shareholder ownership. The balance sheet also provides an overview of the company’s financial position as of a specific date, unlike the income statement and cash flow statement, which reflect on financial performance over an accounting period.
Also see: Best 2023 Samples of Financial Statement of a Company
What Does a Balance Sheet Illustrate?
A balance sheet is a snapshot in time that details a company’s assets and debts. In addition, a balance sheet provides an overview of a business’s financial status at a particular point in time, whereas an income statement details the company’s performance over a given period. Every one of the following properties is a part of it:
- Deposits in the Banking System
- Bills owed
- Inventory
- Budgeted funds set aside for expenditures
- Financial Assets in the Form of Structures and Related Machinery
Also, on the balance sheet, you’ll see the following debts:
- Paid-in-full accounts
- Cash advances from a bank
- All already spent costs
- Substantial and protracted obligation
- Equity funding from shareholders
- Earnings kept over time
What Relationship Exists Between Profits and Other Financial Accounts of a Business?
In the earnings section of the balance sheet, the business’s net profit or loss is shown after all expenses have been deducted. The Statement of Owners’ Equity shows the breakdown of all dividends and distributions made from this account. There are several subtle differences in how the Statement of Cash Flows responds to a loss or a gain. The accrual method is the standard when compiling income statements. In other words, this means that a financial transaction is only recorded when the actual cash is received or sent. When making a statement of cash flow, the profit or loss shown on an income statement must be adjusted down. This is because of non-cash items like interest expense and amortization of assets.
Among these reports, many experts consider the income statement to be the most crucial because the company’s operational results for the year are shown. Its primary use, meanwhile, is as a roadmap for projecting the company’s potential future success. However, to survive and thrive in the long run, businesses need to generate consistent profits. Earnings are critical for funding expansion and giving shareholders a fair return on their investment. Also, by comparing income statements from multiple years side by side, managers can spot any upward or downward trends that could derail the company’s long-term growth plans and determine what steps to take to correct them.
Types of Financial Statements
A company can’t function without numerous types financial of statement materials. That is to say, being on top of your numbers requires more than just adhering to regulations and industry standards. Below are the types of financial statements:
#1. Income Statement
This is one of the types of financial statements. An income statement demonstrates the amount of money a business made and how much it spent over a certain period. Because of this, it is often seen as the most important financial statement. Here, you can find information about the company’s sales, expenses, earnings, net profit (what’s left after taking operating expenses out of total revenue), and earnings per share. It extends over a certain period, says, a year or a fiscal quarter.
Furthermore, its primary objective is to share information about a company’s financial achievements and viability. It might also be quite informative if you compare it to previous time frames to see if the total revenue has been growing. This is one of the types of financial statements financial backers look to gauge the company’s effectiveness in limiting costs, which in turn can lead to higher profits.
#2. Cash Flow Statement
How effectively a business generates cash to meet its cash needs, including those for interest payments, operational expenses, and capital expenditures, is quantified in the cash flow statement (CFS). Cash flow statements serve as an addition to the income statement and balance sheet. Investors can see how a business is doing financially by looking at its cash flow statement (CFS). Also, the CFS can tell you if a business is in a good financial state.
However, you can’t use a formula to figure out how to make a cash flow statement. In its place, it has three sections that detail cash flow reporting for the various operations that a corporation engages in. The CFS has three parts, they include:
- Operating Activities
- Investing Activities
- Fianancing Activities
#3. Balance Sheet
This is also one of the types of financial statements. Here, the information on the balance sheet is only correct as of the date it was made. The income statement, on the other hand, covers a longer period. This document “sets forth the assets and liabilities of a firm as of a specified date,” as the SEC puts it.
Furthermore, as the third most essential type of financial statement, the balance sheet details the organization’s resources, debts, and ownership as of the initial recognition, which is often the end of the fiscal quarter.
#4. Statement of Change in Equity
On the equity statement, you can see how total equity has changed over time. That is to say, the closing balance on the statement of changes to equity should correspond to the total equity shown on the balance sheet for the same period. Variations in shareholder equity can be figured out in a few different ways, depending on the details of each business. However, most of the time, the following are involved:
- First-period equity is the amount of money that was still in the account at the end of the previous fiscal year.
- After taking out all of the business’s costs, the money left over is the profit for the time period. Also, the money made from running the business is treated as equity and added to the company’s “retained earnings” for the year.
- The amount of money distributed to stockholders as dividends in rare cases, a firm may decide to distribute a portion of its earnings to its shareholders.
- It is the increase in the other income statement from one accounting period to the next. This number could be an increase or decrease in equity, depending on the type of transaction.
Generally, acquisitions, sales, the write-down of goodwill, and the depreciation of asset compensation are just some of the transactions that show up on ExxonMobil’s statement of changes in equity. In other words, you can use this information to figure out how much of the company’s profits go back into running the business instead of being given to shareholders or other parties.
#5. Note to Financial Statements
To comply with IFRS (International Financial Reporting Standards) and provide additional context for your other cash flow statement records, you must compile a management discussion and analysis. For instance, the balance sheet may include a section labeled “Assets,” but it is the note to the financial statements that provide the necessary clarification. So, if you want to follow the rules and regulations, you need the data in this document.
Financial Statement Analysis
The balance sheet, income statement, and statement of cash flows are the three primary documents used in financial statement analysis. Investors can get a more complete understanding of a corporate accounting profile by employing multiple methods, such as vertical, lateral, or proportional analysis. Below are the various types of financial statement analysis:
#1. Analysis of Profitability and Return on Investment
In this section, we use financial statement analysis to identify the factors that matter to the bottom line. Using only a “pyramid” of ratios, scientists show how to analyze profitability ratios, agility, and influence. However, because of the complexity of this material, we strongly advise that you first observe a sample of how experts execute this analysis.
#2. Income Statement Analysis
Financial statement analysis typically begins with the income statement. This is the obvious first step in starting a business. We frequently inquire about things like “How much money does it make?” and “Does That Make Money?” What are the profits like? Vertical analysis and horizontal analysis are the two primary types of income statement analysis.
#3. Balance Sheet Analysis
Sometimes, you can tell how well a company is making money and also how quickly it is selling stock by analyzing the balance sheet. The balance sheet can be used to measure a lot of things, like cash, debt, and how well production is going.
#4. Cash Flow Statement Analysis
Investors look at the cash flow statement as the most important indicator of a business’s health. Currently, this is the first place where investors look to see if a company is profitable and what resources it needs to grow. In other words, when evaluating a business’s financial management procedures, it’s crucial to have a firm grasp on the many ratios available for doing so.
What Are the 10 Elements of Financial Statement?
Assets, liabilities, ownership, income, costs, profits, losses, investments by owners, owner distributions, and comprehensive income are the 10 elements of financial statements.
What Are the Four Components of Financial Statements?
They include:
- Income statement
- Balance sheet
- Cash flow statement
- Statement of changes in equity.
What Are the Eight General Features of Financial Statements?
They include:
- The International Financial Reporting Standards say that financial statements should be put together in a fair way (IFRS).
- They should also show that the company is still in business
- They should use the accrual method of accounting, show how important things are and how they add up.
- Be able to be offset, be reported often, show comparisons, and be presented in a consistent way.
Wrapping Up
Finally, with the help of financial statements, people outside of a company can judge how well it is doing financially. Whereas the income statement details how profitable a business is, the balance sheet details how solvent and liquid the company is. A cash flow statement can connect the two by detailing cash inflows and outflows. When taken as a whole, a business’s accounting records reveal its performance through time and in contrast to its rivals.
References
- investopedia.com
- en.wikipedia.org
- corporatefinanceinstitue.com
- wallstreetmojo.com
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