General

A Brief Introduction to Financial Statements and its Users

Rachael Dickson Written by Rachael Dickson · 1 min read >

Let’s first define accountancy. We can refer to accounting as the art of communicating financial information about a business entity to users such as shareholders and managers. Now, this communication is generally in the form of what we call “financial statements.” These statements show the operations and economic resources under the control of the management. Financial statements also help understand business activities by reporting on a company’s performance and financial condition and revealing executive management’s privileged information and insights. It is also referred to as a General-Purpose Report.

Users that require these statements
A. Managers/Employees: They need it to know the state of their employment and their potential future salaries. Additionally, it enables them to compare the efficiency and stability of their business.

B. Investor/Shareholders: They need the information to know if they can invest or re-invest or withdraw from a business and to assess the risk and profitability of the company. To also evaluate managerial or employee’s performance.

C. Creditors and Suppliers: They need to know the accounting information to determine loan terms, interest they can receive and required collaterals, to also draft Loan agreements. They also need it to monitor their contracts with a company.

D. Customers: They need accounting information to know the company’s ability to render services and products. They also need it to know the company’s reliability.

E. Regulators and Tax companies: They demand financial statements for carrying out audit purposes, setting tax policies and collecting taxes from the company.

By law, A director oversees financial statements, but the person who prepares it, is the accountant. The accountant’s role is to ensure that the information provided is useful for making decisions. They prepare these reports that will capture everyone’s decision and tell us what has been done in the business. We have 5 various types of financial statements, which is as follows;

– Financial Statement of Financial position (or Balance sheet statement): This report states the company’s financial position at a point in time. It reports what the company owns (Assets) and the sources of finance, which is the liability sources (Debt finance) and Owner’s equity (Equity finance). The accounting equation for this statement is Assets = Liability + Owner’s equity. For a balance sheet statement, if the total assets are not equal to the total liabilities and total owner’s equity, the sheet is not balanced.

– Financial statement of profit or Loss (or Income statement): This statement captures the operations of the company, having 3 major elements which are: a. Revenue, b. Expenses and c. Profit or Loss. It also states the performance of the company over a period. When Expenses is taken out of the Revenue, that gives a company’s profit or loss. If Revenue is greater than Expenses, it’s considered to be a Profit/Gain. If Revenue is less than Expenses, it’s considered to be a Loss.

– Financial statement of Owner’s equity: This statement gives a summary of major transactions that affected the company owners’ interest during a specific period of time.

– Financial statement of cashflows (or Cashflow statement): This report provides the summary of the company’s source and it’s uses over a period of time, majorly the operational cash flows.

– Notes to the Financial statement: This reveals the specific assumptions that accountants used to create a company’s financial statements.

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