Financial Statement in Accounting

What is financial statement?

It is a formal record or report card of the financial activities and position of a business, person, or other entity. The main users are internal and external users. Internal users includes: owners, management and employees while external users includes: investors, creditors, government parastatals, customers and general public. It performs management evaluation, it shows the true reflection of an organization. This is because it is a transparent process of computation. As a result, it formally reports true status of the company. Usable by existing and potential investors, creditors and lenders. A good financial statement is relevant, concise, complete, comprehensive, timely, reliable, and objective.

Components of Financial Statement

According to IFRS, the financial statement consists of, Statement of Financial Positions, Statement of Comprehensive Income, Statement of Cashflow, Statement of Changes in Equity and Notes. The statement of comprehensive income shows the trading and financial performance of the company during the accounting period. It helps Following IFRS standards, these are its components . As a result of these standards, a complete and concise report comes to life.

Statement of Comprehensive Income

IFRS allows splitting statement of comprehensive income into two: the income statement and statement of other comprehensive income. The income Statement is a financial report that depicts the operating performance of a company (i.e revenue less expenses- i,e profitability over a period of time (typically a month, quarter or year). To calculate Profit, Revenue Less Expenses (Revenue-Expenses= Profit). The basic components of income statement are: Revenue (sales and income). Direct operating cost (cost of sales). Indirect operating cost (such as rent, utilities, salaries). Cost of debt finance (interest rate on loan) and Taxes (company income tax).

Income Statement

The income statement reports revenues and expenses for a particular period. The Income Statement answers three key questions about the business: Firstly, is the business proposition viable? Answer by the Gross Profit (viable) or Loss (not viable). Secondly, is the business run effectively [works well and produces results (profits)] and efficiently (achieved the results without wasting resources)? Thirdly, what benefits attributes to owners of the business (net income)? A second statement starting with the profit (or Loss) for the year from continuing operations (or loss for the year from discounting operations as the case may be) and disclosing the separate components of other comprehensive income.

Statement of Financial Positions

The statement of financial position is the balance sheet. It is a financial statement that reports assets, liabilities, and equity of a company on a given date. As a result,, it lists the resources, obligations, and ownership details of a company on a specific day. There are three components of ‘statement of financial positions’. The first one is Assets (current and non-current-fixed). The second is Liabilities (Non-current also long-term liabilities and current liabilities). The third is Shareholder’s Funds (gotten through reserves and share capital).

Assets

 Assets are resources owned by the firm and used during the business to generate income. Non-current assets are Long term tangible assets. Current assets are assets sold or consumed in the ordinary course of business, within the operating cycle of one year. Liabilities are obligations owed by the firm to others that constitute the claims on the resources of the business. Shareholders fund means the stake or interest of the owners in the business in the profits, reserves generated during operations. Asset is calculated by adding liabilities to equity (Assets= Liabilities + Equity). The above are two of five components of financial statement. I will share the remains in the future.