Overview:

Financial statements present the financial activities and health of the business in a clear and concise manner. Financial Statements include income statements, balance sheet, cash flow statements and statement of retained earnings.

However, further disclosures are made as per relevant laws, regulations and as required by accounting standard that is used.

Financial statements record all the financial data of the business when evaluated and critically analyzed becomes more useful to various stakeholders.

Preparation of financial statement places a high emphasis on accuracy, reliability and relevance of financial data.

Financial statements record all the financial data of the business when evaluated and critically analyzed becomes more useful to various stakeholders.

Preparation of financial statement places a high emphasis on accuracy, reliability and relevance of financial data.

Balance Sheet provides a summary of the position of the business at a particular date while the income statement shows the incomes and expenses incurred during the period.

Cash flow statement shows the movement of cash in the business.

By using these statements, stakeholders could understand and assesses the entity’s financial performance and positions and especially clearly knows each element such as revenues, expenses, assets, liabilities and equity.

Key advantages of financial statements:

  1. Review of Cash Flow: It shows the financial solvency and the ability of the company to pay liabilities to pay its liabilities. The statement of cash flow statement breaks the statement into operating, investing and financial parts. Review of cash flow helps us understand whether the business is operating under a cyclical revenue stream structure or consistent revenue model. This also helps the business to maintain and keep the expenditure of business inline within the revenue model it operates in.
  2. Review of Liability: Financial statements presents the short- and long-term obligations of the business. If the owner wants to expand his business, he must look at the statements of financial position and deduce the logic as to whether he should reduce existing liabilities to apply for further capital expansion. Lenders look at the financial statements and determine the prospect of business on the basis of revenues, assets and liabilities.
  3. Review of Inventory and its movement: The levels of opening and closing stock as a percentage of purchase and sales along with the changes and movements in the levels of stock throughout the year shows the ability and nature of goods of the business. It shows whether the goods are in demand, fast-moving or slow-moving or change in the trend of sales and so on. When the goods are slow-moving as compared to industry, it is considered as a negative for the business prospect and growth.
  4. Identification of Trends: The business owner should prepare and compare financial statements over various periods so as to identify the trend in business. This helps the business in knowing what products are selling well, what segments are growing well and which segment of business needs further review and re-investment or complete exit at once. Trends are the gospel in the performance of the business. Identifying trends is, therefore, a necessity for the business to sustain the growth and achieve higher profits.
  5. Preparation of Budget: Every business must have a vision. To prepare vision, the business must have defined goals and objectives. The objective of financial statements is to prepare a blueprint for the future by analyzing the past financial statements already prepared and audited. Budgets help to keep the expenses in line with income and sales. The budgets are forecasted using prepared financial statements.