Financial statements present the financial activities and health of the business clearly and concisely. Financial Statements include income statements, balance sheets, cash flow statements, and statements of retained earnings.
However, further disclosures are made as per relevant laws, regulations, and as required by the accounting standard that is used.
Financial statements record all the business’s financial data, when evaluated and critically analyzed, becomes more useful to various stakeholders.
The preparation of financial statements places a high emphasis on the 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.
The balance sheet provides a summary of the financial position of the business at a particular date. At the same time, the income statement shows the entity’s financial performance, which normally includes the incomes and expenses incurred during the period.
The cash flow statement shows the cash flow in the business during the period, which is normally breakdown into three sections if it is prepared under the indirect method. Those sections include cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.
Using these statements, stakeholders could understand and assess the entity’s financial performance and positions and especially clearly know each element such as revenues, expenses, assets, liabilities, and equity.
Below we will discuss the benefit that users of financial statements could get from each financial statement as well as the complete set of financial statements.
Key Advantages of Financial Statements:
- 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. A cash flow review helps us understand whether the business is operating under a cyclical revenue stream structure or a consistent revenue model. This also helps the business maintain and keep the expenditure of the business in line with the revenue model it operates in.
- 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 business prospects based on revenues, assets, and liabilities.
- 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, show the business’s ability and nature. 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 compared to industry, it is considered a negative for the business prospect and growth.
- Identification of trends: The business owner should prepare and compare financial statements over various periods to identify business trends. This helps the business know 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 growth and achieve higher profits.
- Preparation of budget: Every business must have a vision. To prepare a 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.