Financial statements are written records of a company that gives information about its activities and performance. Almost all companies around the world prepare financial statements. Usually, the laws and accounting standards that a company operates in requires it to prepare financial statements. However, some companies may also voluntarily prepare financial statements if not required to do so.
Depending on the size and nature of a company and the jurisdiction it operates in, there are various financial statements they can prepare. Most commonly, companies may prepare only two or three of the fundamental financial statements. However, as a whole, there are five financial statements. Given below is a brief description of each of them.
Balance Sheet
The Balance Sheet is the primary financial statement prepared by companies. It contains a list of all the assets, liabilities, and equity of a company. Simply put, it shows a snapshot of the company until the date of preparation. The focus of the Balance Sheet is to show the financial position of a company. It follows the accounting concept that at any given time, the total assets of a company will be equal to the sum of its total liabilities and equity.
Income Statement
The Income Statement is another primary financial statement that shows the performance of a company. It represents the performance in the form of the profits made by the company. To calculate its profits, the Income Statement deducts all the expenses of the company from its revenues. Companies can also categorize their expenses based on their nature to provide more information about their operations. Overall, the goal of the Income Statement is to show the company’s profits.
Cash Flow Statement
The Cash Flow Statement focuses on a critical part of any business, its cash and cash equivalent balances. While profits are the key indicator of a company’s performance, its cash flows are also crucial. Many profitable businesses fail due to cash flow problems each year. Therefore, the Cash Flow Statement shows the changes in the cash and cash equivalent balances of the company for a specific period. It also categorizes cash flows under operating, financing, and investing activities.
Statement of Changes in Equity
The Statement of Changes in Equity can come in different forms based on the laws and accounting standards that apply to the company. It shows all the changes that occur in the equity balances of a company for a specific period. For some companies, preparing this statement may not be a requirement. However, it is a crucial financial statement for some stakeholders, especially shareholders.
Notes to the Financial Statements
The Note to the Financial Statements is a supportive financial statement that provides additional information about the company and the other financial statements mentioned above. It gives detailed information about some of those statements. It can also include valuable information about the company’s operations and accounting policies, which dictates how companies record balances and transactions. Overall, the Notes to the Financial Statements provide detailed information about the company.
Conclusion
There are five financial statements that companies may need to prepare. These are the Balance Sheet, Income Statement, Cash Flow Statement, Statement of Changes in Equity, and Notes to the Financial Statements. Given above is a brief description of what each of these is.
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