Financial Statements are the reports 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 required to have an annual audit by independent auditors and they have presented along with other information in entity annual report.
They are presented in two comparison periods so users could understand how is the current period’s financial performance compared to the corresponding period.
Based on IAS 1, there are five types of Financial Statements that entity required to prepare and present if those statements are prepared by using IFRS, and the same as if they are using US GAAP.
Most of local GAAP also required the same thing. It is very important that the statements are prepared and presented in the true and fair view and respect to the acceptable financial reporting framework and the law.
Financial statements are used by different stakeholders including 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 in monthly, quarterly, annually or the period required by management.
Those five types of financial statements including income statement, statement of financial position, statement of change in equity, statement of cash flow, 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 are the expenses incurred and how much is the profit or loss during the period, then income statement is the statement that the user should be looking for.
The detail of this three main information are:
Revenues refer to sales of goods or services that the entity generates during the specific accounting period.
The revenues that present in the income statements are the revenues generating from both cash sales and credit sales. In the revenues section, you could know how much the entity makes net sales for the period they are covering.
Revenues normally report as the summary in the income statement and if you want to check the detail, probably you need to check with the noted to the revenues that provided in the financial report.
In Noted, users may see the different lines of revenues that the entity is generating for the period. This could help users to understand which line of revenues are 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 as the result of 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 are ranking 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, 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.
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 forward to retain profit or loss in the balance sheet and statement of change in equity.
2) Balance Sheet:
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 net worth of the entity. 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 while 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.
Noncurrent assets including tangible and intangible assets that expected to convert and consume in more than 12 months from the reporting date. Those assets include land, building, machinery, computer equipment, long term investment and similar kind of.
Intangible fixed assets are charged into income statements systematically based on their using and contribution.
In the accounting equation, assets equal to liabilities plus equities. They are increasing on debit and decreasing credit.
Liabilities are the obligation that an entity owes 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 willing to pay back the debt with one year.
For example, purchase on credit within one month should be recorded as a current liability.
Non-current liabilities are the debt or obligation that due to more than one year or more than twelve months.
For example, long term lease that 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, prefer sock, 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 from 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 in equity 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 statement of cash flow is one of the financial statements that show the movement 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.
In general, the information will be shown base on the method of cash flow 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 entity has to disclose all information that matters to financial statements and help users to have a better understanding.
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 detail information of 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 go to note to those fixed assets.
Written by Sinra