According to IAS1, financial statements are statements that provide a picture relating to the financial health of a business.
During the brush-up, we were made to understand that there are Four plus One financial statement.
- The Statement of Profit or Loss and other comprehensive income also known as Income Statement
- The Statement of Financial position also known as Balance sheet
- Statement of Cash flows
- Statement of Changes in equity
Plus One: Notes to the Accounts
Now, let us take them individually.
Statement of Profit or Loss and other comprehensive income:
Also known as the Income statement, this measures the performance of the entity during a period. Its major accounts include the Revenue or Sales, Direct costs, expenses, other income, etc.
Also, it can be presented as a single statement or split into two, namely, the Statement of other comprehensive income and the statement of profit or loss.
When analysing the Statement of Profit or Loss, Revenue is always the base account used as a denominator.
Statement of Financial position
This is an important statement used by stakeholders, especially investors. It shows the financial wealth of an entity as at a particular date.
This financial statement is unique because it houses three important Accounts, which include: Assets, Liabilities and Equity.
Basically, from here, you can get an overview of the entity’s, liquidity, debt, and shareholdings. And if you look at a typical example, you will see that it houses the accounting equation:
(Asset = Liabilities + Owner’s equity).
Also known as the Balance sheet, the statement of financial position must balance out. That is, the accounting equation must be followed to a T.
Statement of Cash flows
The cash flow statements show the actual amount of cash inflows and outflows. It has three sections which are:
- Operating Activities
- Investing Activities, and
- Financing activities.
Please know that only items that are cash and cash equivalents are what is required to be reported on the cash flow statement. Thus, no noncash item can be recorded.
Statement of changes in equity
This records how the equity component has changed from what they are at the beginning of the year to what they are at the end. Going from the sale of shares, to purchase, to returns (Dividends).
It basically reconciles the beginning and closing balances of a company’s equity in a reporting period.
Beginning equity + Net income – Dividends +/- Other changes = Ending equity
Notes to the Account
The other financial statement above carries the closing balances of the various accounts. But the breakdown of these balances are found in the notes.
It includes the explanation of the assumptions used in the preparation of the numbers in the Statement of financial position, profit or loss statement, and Cash flow statement
They help different types of users, especially those who are not proficient with financial accounting, to interpret all the numbers added to the financial statements.
Not just that, the notes may also provide information on underlying issues relating to the overall financial health of the company.
Also, Auditors use the notes to determine if the accounting policies used are appropriate, properly applied and reflected in the reported results of the company.