Financial Statements or financial report shows a formal record of all the financial activities carried out by an entity during a financial tenure and its financial position. These are written reports that determine the performance, financial strength and liquidity of an entity. The financial statements manifest the impact of day to day financial transactions impact on an entity.
Types of Financial Statements
The main components of an entity’s financial statements are
Profit and Loss Statement
The income and expenditure statement or the profit and loss statement (P&L) represents revenues generated by an entity and the expenses incurred by it to generate those revenues. Profit or loss is the end result of this statement which can be quantified by finding out the difference between generated revenues and expenses incurred.
Profit or Loss = Revenue/Income – Expense/Expenditure
These figures help an entity to take necessary actions depending upon the result and also influence expense management, product pricing including entities marketing strategies.
The balance sheet is a statement that represents an entity’s financial picture such as what an entity owes and what it owns at a specific point of time. The main heads in the balance sheet are assets, equities and liabilities.
The balance sheets follow the below-mentioned accounting equation to balance out an asset, equities and liabilities
Assets = Liabilities + Equity
This helps an entity to know what the financial position is at a specific time period.
Cash Flow Statement
The cash flow statement or a statement of cash flows is a financial statement represents how changes in the balance sheet, profit and losses impact inflow and outflow of cash and cash equivalents. The cash flow statement has 3 main headings
- Operating activities: Includes all the activities related to the working of an entity
- Investing activities: Shows all those activities that are related to the investment of an entity
- Financing activities: List those activities that are concerned with the entity’s finances.
Notes to Accounts
The basic motive of this financial statement is to show the elaborated information of all Profit and loss, balance sheet and cash flow statement. For instance, an entity’s balance sheet contains the head intangible asset having the value 2,00,000 INR. Now, the entity of the owner will come to know about what item comes under the head of the intangible asset such as goodwill, patent or copyright and what are their respective values.
The Link between Financial Statements
The following chart consolidates how different financial statements are linked to each other
Importance of Financial Statements
Financial statements are like snippets that help a user of an entity to know their true and fair financial position during a specific period of time.
Owners, Managers, and Employees
Financial statement helps them to take important financial decisions that will ensure an entity’s continued operations.
These financial statements help the potential investor to know whether to invest in an entity or not. In a case if he wants to then how much amount shall be invested can easily analyzed using these financial statements.
Based on these financial statements financial institutions decide whether to grant loans to an entity that may be needed by them to meet working capital needs or for expansion.
“The information contained herein is not intended to be a source of advice with respect to the material presented, and the information and/or documents contained in this article do not constitute any personal advice.”