Financial statements are the reports or statements that provide the detail of the entity’s financial information, including assets, liabilities, equities, incomes and expenses, shareholders’ contribution, cash flow, and other related information during the period of time.
These statements normally require an annual audit by independent auditors and are presented along with other information in the entity’s annual report.
They are presented in two comparison periods to understand the current period’s financial performance compared to the corresponding period so that users could see how the entity financially performs.
Based on IAS 1, there are five types of Financial Statements that the entity must prepare and present if those statements are prepared by using IFRS, and the same as if they are using US GAAP.
Most local GAAP also required the same thing. The statements must be prepared and presented in the true and fair view concerning the acceptable financial reporting framework and the law.
Financial statements are used by different stakeholders, including the entity’s management, shareholders, investors, staff, majors customers, majors suppliers, government authority, stock exchanges, and other related stakeholders.
In general, there are five types of financial statements that prepare by an entity monthly, quarterly, annually, or the period required by management.
Those five types of financial statements include the income statement, statement of financial position, statement of change in equity, cash flow statement, and the Noted (disclosure) to financial statements.
In this article, we will discuss all of those completed set financial statements.
1) Income Statement:
The income statement is one of the financial statements of an entity that reports three main financial information of an entity for a specific period of time. Those information included revenues, expenses, and profit or loss for the period of time.
The income statement is sometimes called the statement of financial performance because this statement lets the users assess and measure the financial performance of an entity from period to period of the similar entity, competitors, or the entity itself.
This statement could be present in two different formats that allow by IFRS based on an entity’s decision. The first format is a single statement format where both income statements and other comprehensive statements are present in one statement.
The second format is the multi-statement, where income statements and other comprehensive income are present in two different formats.
In conclusion, if the users want to see how much the entity makes sales, how much the expenses are incurred and how much is the profit or loss during the period, then the income statement is the statement that the user should be looking for.
The detail of these three main information are:
Revenues refer to sales of goods or services that the entity generates during the specific accounting period.
The revenues present in the income statements are the revenues generated from both cash sales and credit sales. In the revenues section, you could know how much the entity makes net sales for their covering period.
Revenues normally report as the summary in the income statement. If you want to check the detail, you probably need to check with the noted revenues provided in the financial report.
In Noted, users may see the different revenue lines that the entity is generating for the period. This could help users to understand which line of revenues is significantly increasing or declining.
In double entries accounting, revenues are increasing on credit and decreasing in debit. It only recognizes when there is the probability of economic inflow to the entity due to the sale of goods or services. And the risks and rewards of sales are transferred.
Expenses are operational costs that occur in the entity for a specific accounting period. They rank from operating expenses like salary expenses, utilities, depreciation, transportation, and training expenses to tax expenses and interest expenses.
Expenses here also include the costs of goods sold or the cost of rendering services that incur during the period.
Yet, they normally report in the different line between the cost of goods sold and general and administrative expenses.
In the income statement, expenses could be presented based on their nature or based on their function.
Expenses are recording in a different direction from revenues in terms of the accounting entry. They are increasing in debit and increase in credit.
1.3 Profit or Loss:
Profit or loss refers to net income or the bottom line of the income statement that results from deducting expenses from revenues.
If the revenues during the period are higher than expenses, then there is profit.
However, if the expenses are higher than revenues, then there will be losses.
Profit or loss for the period will be forward to retain profit or loss in the balance sheet and statement of change in equity.
2) Balance Sheet:
A Balance Sheet is sometimes called the statement of financial position. It shows the balance of assets, liabilities, and equity at the end of the period of time.
The balance sheet is sometimes called the statement of financial position since it shows the values of the entity’s net worth. You can find entity net worth by removing liabilities from total assets.
It is different from the income statement since the balance sheet reports account’s balance at the reporting date. In contrast, the income statement reports that the account’s transactions during the reporting period.
If the user of financial statements wants to know the entity’s financial position, then the balance sheet is the statement the user should looking for.
Assets are resources own by an entity legally and economically. For example, building, land, cars, and money are types of assets of the entity. Assets are classified into two main categories: Current Assets and Noncurrent Assets.
Current Assets refer to short-term assets, including cash on hand, petty cash, raw materials, work in progress, finished goods, prepayments, and a similar kind that convert and consume within 12 months from the reporting date.
Non-current assets, including tangible and intangible assets, are expected to convert and consume more than 12 months from the reporting date. Those assets include land, building, machinery, computer equipment, long-term investment, and similar kind.
Intangible fixed assets are charged into income statements systematically based on their using and contribution.
In the accounting equation, assets are equal to liabilities plus equities. They are increasing on debit and decreasing credit.
Liabilities are an entity’s obligation to other persons or entities—for example, credit purchases, bank loans, interests payable, taxes payable, and an overdraft.
The same as assets, liabilities are classified into two types: Current Liabilities and Non-current liabilities. The liabilities are the balance sheet items, and they represent the amount at the end of the accounting period.
A current liability is an obligation that is due within one year. In other words, the entity is expected to pay or be willing to pay back the debt with one year.
For example, a purchase on credit within one month should be recorded as a current liability.
Non-current liabilities are the debt or obligation that is due for more than one year or more than twelve months.
For example, a long-term lease that is due in more than twelve months should record in the non-current liability.
Equities are the difference between assets and liabilities. The items in equity include share capital, retain earning, common stock, preferred stock, and reserves.
The change of assets and liabilities over the period will affect the net value of equity. You can calculate the net value of equity of an entity by removing liabilities from assets.
The net income or loss of the company record in the income statement during the period will be added to the opening balance of retained earnings or accumulated loss.
3) Statement of Change in Equity:
A statement of change inequity is one of the financial statements that show the shareholder contribution and movement in equity. And equity balance at the end of the accounting period.
Information that shows is these statements include classification of share capital, total share capital, retain earning, dividend payment, and other related state reserves.
Basically, if the income statement and balance sheet are correctly prepared, the statement of change in equity would be corrected too.
4) Statement of Cash Flow:
The cash flow statement is one of the financial statements that show the movement (cash inflow and outflow) of the entity’s cash during the period. This statement help users understand how is the cash movement in the entity.
There are three sections in this statement. They are cash flow from the operation, cash flow from investing, and cash flow from financing activities.
For example, cash flow from operating activities helps users know how much cash an entity generates from the operation.
The users could also understand the company’s cash flow on investing activities by reviewing the cash movement in investing activities section. For example, users could the cash movement that the company use for purchasing PPE.
Also, users want to see the cash movement of the company on investing activities which including the actual fund that the company received and pay off the loan, for example. Other similar investing cavities fund flow also reports in this section.
In general, the information will be shown based on the cash flow method that the entity prepares. It includes direct and indirect methods.
5) Noted to Financial Statements:
Note to Financial Statements is the important statement that most people forget about.
This is the mandatory requirement by IFRS that the entity has to disclose all information that matters to financial statements and help users better understand.
Note or sometimes call disclosure detail the financial information related to the specific accounts. For example, in the balance sheet, you will see the balance of fixed assets.
But detailed information on those fixed assets is included not in the statement of financial position. If the users want to learn more about those fixed assets, they need to note those fixed assets.
What is the order of financial statements?
Now we already know what are the financial statements that the company need to prepare for the period in order to comply with the relevant financial reporting standard.
But, among these statements, which statement need to prepare first?
The correct order of financial statements is income statement, statement of change in equity, statement of financial position and statement of cash flow.
However, before you could prepare the income statement, you will need to have the correct trial balance first. Once you have the corrected trial balance, then you can start prepare income statement.
Now, after you finish income statement, you should be able to draft the statement of change in equity, follow by balance sheet and finally, you can draft statement of cash flow.
Noted to financial statement is practically draft in word file and at the time the four financial statements are finalise.
Can non CPA approve financial statements?
Yes, financial statements could be approved by non CPA and it is normally approved by Board of Director after endorse by audit committee. The date of approval should be before or the same date of auditor’s opinion date.
Written by Sinra