Get to Know Your Financial Statements
In the simplest sense, nobody is as interested as the whole account of your personal life more than you are. Well, people just come and go at certain points in time, leaving traces of influence, or perhaps legacies that impact the way your life goes. This is also true with business entities. Owners and other stakeholders are most interested in how well the operation goes, as investments must be recouped in the shortest span possible. Activities though can never be contained in the memory capsule of a single individual. These need to be recorded strategically and later analyzed to significantly affect operations-hence, the emergence of financial statements.
What is a financial statement? It formally puts into writing all the financial pursuits of the business and their results. Finances are crucial in any business endeavor. The role of financial statements is to produce the necessary information for any stakeholder to make informed decisions pertaining to his interest in the said business.
Financial statements have different forms and types. Depending on the nature of the business, whether profit-oriented or not, expect that the formats can vary. Governing accounting standards in preparing said statements lay down the basics and are simply followed, as the circumstances dictate.
Learn the nitty-gritty of these financial statements in the two major discussions below.
What is a Financial Statement – the Three Types
Accountants primarily prepare financial statements and the three basic types are laid as follows:
1. Balance Sheet: this statement reports all of the assets, liabilities and equity at a specific point in time.
2. Statement of Operations: also known as the profit and loss statement, it provides information on the performance of the business over a set period of time. It shows the income and expense items included in the profit and loss calculation. The Statement of Operations also provides explanation on the transactions affecting the equity in the given reporting period.
3. Statement of Cash Flows: sources of cash inflows and outflows broken down into three major categories- operating, investing and financing activities- along with the monetary figures are laid down in this statement.
As businesses tend to vary in terms of size, financial statements can range from being short to very lengthy ones. Statements may also prove to be very complex, depending on the nature of transactions involved.
What is a Financial Statement – the Purpose
Financial statements serve to provide information that is useful to a wide array of users, particularly in formulating economic decisions. Hence, they must contain these basic ingredients: relevance, reliability, understandability and comparability and readers are assumed to possess reasonable knowledge of both business and accounting principles, and are willing to put diligence in studying them.
Among the identified users of the information contained therein are owners and managers, employees, investors, lenders, creditors, government and the general public. Financial statements must therefore be prepared with accuracy and in conformance to the prevailing standards, as they build trust and confidence and influence important business decisions.