A business’s financial statements play an important role in ensuring the success of the business. Keeping track of a company’s finances is necessary to be able to run the business as effectively and as efficiently as possible. A business’s financial statement is a document that provides a detailed outline of the money going in and out of the business, the assets that a company owns, and the liabilities that the business currently has.
If you own a business, whether it is a large company or a small business, it is important for you to update your financial statements on a regular basis in order to have access to accurate information regarding your company’s finances. If you want to learn more about financial statements, then this article is for you! In this article, you will read about the important things that you need to know about financial statements, the kinds of financial statements and some important guidelines that you need to remember when creating one. We also have financial statement samples and templates available for download on our website.
Things You Need to Know about Financial Statements
A financial statement is a document that records the financial activities that the business has for a particular period of time. Furthermore, a financial statement helps businesses understand their financial status. Here are some of the things that you need to know about financial statements:
- A financial statement is a document that is used by businesses to create a scorecard. This scorecard is used to compare financial data with the actual results in order to make financial decisions.
- A financial statement allows businesses to see their current financial performance as well as provides the business with the right information to show them where the company is going or headed to in the future.
- Financial investors use a financial statement to decide whether to invest in a company or not since a financial statement shows the status of the company and whether investing their money in that company will give them profit.
- An income statement, which is a type of financial statement, contains information on the different financial trends of a particular company such as the sales trend, revenue trend, and the profitability trend. These types of information are important for investors when deciding and making their financial decisions.
- An income statement also helps investors determine the ability of a particular business to generate profit, which is necessary for investors.
- A cash flow, also part of a financial statement, is also one of the most important aspects of a financial statement since it allows companies to see the inflows of cash or the cash going in a business and the outflows or the cash going out of the business.
- A business’s financial statements are also used when performing a company audit. The information contained in a financial statement help companies create an effective and accurate financial audit and financial report.
Kinds of Financial Statements
Businesses need to use financial statements to ensure that they are well aware of how the condition of the business is going in terms of financial stability. There are different kinds of financial statements which usages vary depending on their content and how these contents will be used for a variety of transactions. Some samples of financial statements are as follows:
1. Comprehensive Income Statement. There are three main items that a comprehensive income statement talks about and they are the income, profit, and expenses of the company within a specific time period. Also known as the statement of profit and loss (P&L), a comprehensive income statement talks about the revenue and expenses of the business and how these factors can affect the current condition of the company.
2. Balance Sheet. A balance sheet is the kind of financial statement that uses details regarding the following:
- The assets of the business
- The liabilities that the business acquired
- The owner’s equity
Balance sheets need to be precise when it comes to the duration that it covers. As a statement about the financial position of the business, balance sheets shall be used accordingly as it can help a business identify whether operations are still sustainable or not.
3. Cash Flow Statement. The activities of the company that affects its cash flow are essential to be recorded. With this, a cash flow statement is important to exist as it can guide the business in terms of ensuring that proper cash flow is implemented within the business’s operations as well as its investments and other financial activities.
4. Equity Statement. An equity statement contains the information about the retained earnings of the business. This financial statement specifies the changes in the equity of the company. Just like the other kinds of financial statements, equity statements assess financial performance in a specified time period.
The usage of these financial statements varies depending on the market scope of the business, the nature of operations of the company, and the processes and regulations in terms of financial issues that a business follows. A financial statement may include all these information and there are also times where the individual presentation of these specific statements may be requested.
Guidelines for Creating a Financial Statement
If you will create a financial statement, here are some guidelines and tips that you may incorporate in the processes of making the document:
- Be aware of the kind of financial statement that you need to create. As we have mentioned, there are different ways that financial statements may be used. With this, you need to be keen with the information that you will put together so you can achieve the purpose on why a particular financial statement needs to be created.
- Ensure that the information that you will place in a particular financial statement is necessary and relevant to the purpose on why the financial statement needs to be created.
- The financial information that you will put in a financial statement should be precise, concise, and accurate. These details should be based on actual resources and must be assessed varying on their actual usages and/or acquisition.
- You should first develop a format or structure that the financial statement should follow so people who will look at the document will have an easy and fast time in identifying and understanding its content.
- The financial statements that you will create should be backed up by relevant resources. More so, there shall be an in-depth discussion with the management about the content of the financial statements for the details within the documents to be verified.
- It can help you a lot if you will refer to templates of the financial statement that you need to create. This way, you can have an idea on how to create the content and format of the document that you are tasked to do. Moreover, using past financial statements of the company as your references can make it easier and faster for you to identify the information that you need to collate and assess.
- Proper analysis should be done whenever you are in the process of creating a financial statement. The information that will be evaluated in these documents can affect the operations of the business, which is why you need to be keen when presenting and using data.
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