Financial statements are written records that convey the financial performance and business activities of a business entity. The users of financial statements include investors, regulatory bodies, employees, management…etc. Financial statements serve as a guide to help the users of financial statement make meaning decisions.
There are 4 major financial statements but the “notes to the financial account” are also very relevant and can be mentioned because it gives more information and the major financial statements.
- Income Statement/ Profit or loss Statement: Records the revenue, expenses and profit of an entity over a period of time. A company might be generating a lot of revenue but also incurs a lot of expenses in the process. The income statement can tell a potential investor if the company is really making profit or not regardless of the company’s revenue.
- Statement of financial position / Balance sheet: This gives a snap shot of an entity at a given point in time. The Balance Sheet shows the financial health of a business entity. From the balance sheet of a company, an investor can tell what the capital structure of a company looks like. He can tell the percentage of a company’s equity when compared with liabilities. The accounting equation for the balance sheet is Asset= Liabilities + Owners Equity. Statement of financial position is made up of the following;
Asset: Assets are what a company uses to generate revenue. Asset is one of the accounts in the accounting equation Asset= Liabilities + equity. Asset is also one of the vital accounts on the balance sheet and it is categorized in the following:
➢ Current asset
➢ Non-current asset.
Equity: Equity is owner’s stake/ contribution in a business. During the set up stage or some point during the life time of a business, funds will be needed to finance the business for investing and operating purposes. Such fund that is raised by the owners of the business is called equity. A change in owners’ equity may arise as a result of additional contribution, retained earnings, non-controlling interest and other forms of equity
Liability: Liabilities are what an entity’s owes. It is an entity’s obligation that can be short term liabilities or long term liabilities. Liability for a business is a way of funding the business and it is an important part of the accounting equation Asset= Liabilities + Owners equity.
- Cash flow Statement: A cash flow statement is a financial statement that records/ summarizes the inflow and out flow of cash and cash equivalents of an entity. There are three types of cash flow:
➢ Financing: Financing activity of a business entity is basically how the business raises money. This can be in form of liabilities (borrowed money) or equity (funds committed
to business entity by the owners)
➢ Investing: Investing activities is how the business entity makes use of the money that was raised from financing. e.g. Buying a vehicle for a transport company to move passengers to desired location at a cost.
➢ operating: Operating activities
- Statement of change in equity: Statement of change in equity is a financial statement that shows the shift/ change in the owners’ equity in a business entity. After the startup year of a business, investors can decide to invest more money into the business or reinvest the profit of the business. Such decisions will increase the stake of the owners of the business in the business. It can also reduce if the company is recording losses.
The shift in owners’ equity can be as a result of the following:
➢ Retained earnings
➢ Contributed Capital
➢ Non-controlling interest
➢ Issuance of shares
➢ Stock repurchase
+1 Notes to the account: Note to the account is an important part of financial reports that elaborates more on the components of statement of financial position, Statement of Profit or Loss, Statement of Cash Flow, and Statement of Change in Equity. You can find the breakdown of sources of revenue; break down of expenses, Taxation … etc. in the notes to the account. The major financial statements are usually not more than a few pages but the notes to the account are usually recorded on more pages than the major 4 financial statement in a financial report.