Financial statements are the formal records or report that describes the financial detail of the business. It includes assets, liabilities, incomes and expenses, equities, shareholders’ contribution, cash flow, and other related information during the period of time.
These statements are prepared and audited at least annually, by an independent auditor and presented with other information in the business’ annual report.
They are presented in two comparison periods to understand the current period’s financial position relative to the corresponding period so you can see how the business is performing financially.
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.
Based on IAS 1, there are five types of Financial Statements that your business must prepare and present.
The five types of financial statements are income statements, statement of financial position, statement of change in equity, Cash Flow Statement, and the Noted (or disclosure) to financial statements.
An income statement contains three main pieces of financial details of the business for a specific accounting period. Income, Expenses incurred and Profit (or loss).
Sometimes referred to as the Statement of Financial Performance, because this statement allows you to assess and measure the financial performance of the accounting period of similar businesses, competitors or the business itself.
The IFRS allows two different formats. Either a statement of profit or loss and other comprehensive income for the period (presented as a single statement, or by presenting the profit or loss section in a separate statement of profit or loss, immediately followed by a statement presenting comprehensive income beginning with profit or loss).
Revenue refers to what the business has earned over the accounting period. Sale of goods, dividends or income. This includes both cash sales and credit sales.
The cost incurred by the business over the accounting period (e.g. salaries and wages, depreciation, rental charges, etc).
Profit or Loss
Net profit or loss is arrived by deducting expenses from income.
If the revenues during the period are higher than expenses, then there is profit.
If 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.
Sometimes known as the Statement of Financial Position, it presents the financial position of the business at a given date. It is comprised of the following three elements:
Are the resources the business owns or controls. (Eg cash, stock, equipment or machinery)
You can seperate assets into Current assets and Noncurrent assets. Current assets refers to short-term assets such as cash, prepayments and finished goods. Something that will be consumed within 12 months.
Non-current assets are expected to be consumed beyond 12 months. Land, Machinery, Computer Equipment are examples of noncurrent assets.
Is something the business owes to someone. (Eg bank loans, creditors, suppliers)
Similar to Assets, liabilities can be defined as Current liabilities and Non-Current liabilities.
A current liability is something that is due within 12 months. I.e. the business is expected to pay or be willing to pay repay the debt obligations within 12 months. Eg A credit purchase is expected to be repayed within 12 months.
Non-current liabilities is debt that is due for more than 12 months.
For example, a long-term property lease that is recoreded as a non-current liability.
What the business owes to its owners. This is the amount of capital that remains afther the business uses its assets to pay off its outstanding liabilities.
Equity = Assets – Liabilities
The net income or loss of the business in the income statement during the period will be added to the opening balance of retained earnings or accumulated loss.
Statement of Change in Equity
Sometimes known as the Statement of Retained Earnings, the Statement of Changes in Equity, details the movement in owners’ equity over the accounting period. The movement in owners’ equity is derived from the following components:
- Net Profit / loss during the accounting or reporting period as reported in the income statement
- Share capital issued / repaid during the period
- Dividend payments
- Gains / losses recognized directly in equity (e.g. revaluation surpluses)
- Effects of a change in accounting policy or correction of accounting error
If the income statement and balance sheet are correctly prepared, the statement of change in equity would be corrected too.
Cash Flow Statement
The statement of cash flow shows the movement of cash (in and out) of the business during the accounting period. This statement help you understand how cash is used in the business.
It contains three sections:
- Cash flow from the operating activities. How cash flows from the primary activities
- Cash flow from investing activities. How the purchase and sale of assets (other than inventory) was used. Eg long term leasing agreements for equipment purchases
- Cash flow from financing activities. Cashflow generated (or spent) on raising and repaying share capital & debt, along with interest payments and dividends paid.
Cash flows from operating activities helps you know how much cash the business generates from the its normal operation. You can also understand the business’ cash flow on investing activities by reviewing the cash movement in investing.
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.
Notes to Financial Statements
Notes to the financial statements disclose the assumptions made by when preparing the income statement, balance sheet, statement of changes of equity or statement of retained earnings. The notes are essential to fully understanding these documents.
This is a mandatory requirement by the IFRS to disclose all relevant information that matters.
For example, in the balance sheet, you will see a summary of the balance of fixed assets. The notes to financial statements provide the list of what those acctual assets are.