At the end of each year, companies or businesses must report their activities to their stakeholders. They achieve that through financial reports, also known as financial statements.
What is a Financial Report?
A financial report, or a financial statement, represents formal records of an entity’s activities. Usually, financial reports represent the prevalent reports that companies or businesses present at each year-end. These reports include relevant information about their position, performance, and other aspects of their business.
Preparing and presenting financial reports to stakeholders may be a legal requirement for some companies. This case is applicable for public-listed companies. However, some companies may also prepare these reports voluntarily if not required. Typically, there are four primary financial reports or statements. However, depending on the rules and regulations, companies may prepare more or fewer reports.
What are the primary Financial Reports?
As mentioned, there are four primary financial reports that the company typically produces. These include the Balance Sheet, Income Statement, Cash Flow Statement, and Statement of Changes in Equity. Each of these represents various aspects of a company’s activities. Mostly, companies prepare these statements annually. However, some may also produce these quarterly or semi-annually.
Given below is a brief description of what each financial report is.
A company’s Balance Sheet shows its financial position up to a specific time. It consists of account balances categorized as either assets, liabilities, or equity. Unlike the other financial reports, a company’s balance sheet does not report its activities for a specific period. In short, the Balance Sheet provides stakeholders with a snapshot of the company until its date of preparation.
The Income Statement, or Statement of Profit or Loss, presents the company’s earnings and income. It consists of the company’s revenues and expenses for a specific period. Similarly, it is the primary financial report that indicates a company’s financial performance. The Income Statement also reports a company’s income, often categorized as either gross, operating, and net profits.
Cash Flow Statement
While most people confuse profits and cash flows, they are not the same. Therefore, companies must also report their cash flow changes through a Cash Flow Statement. This statement categorizes the movements as either operating, financing, or investing cash flows. The Cash Flow Statement is a crucial financial report for analyzing a company’s liquidity.
Statement of Changes in Equity
The Statement of Changes in Equity is only for companies. For other entities, the statement may have a different name and form. Either way, it shows a company’s equity balances and the changes in those balances for a specific period. For some companies, the preparation of the Statement of Changes in Equity may not be a requirement.
What is the purpose of Financial Reports?
Financial reports can have various purposes. The primary reason why companies prepare financial reports is for their stakeholders. These reports may also be a requirement from the government for reasons such as taxation. They also clarify a company’s financial health, position, and performance. Similarly, it can help stakeholders evaluate a company’s operations.
Each financial report mentioned above has its own purpose. Overall, financial reports help users in decision-making, planning, and forecasting.
A financial report is a written record of an entity’s activities. Usually, there are four primary financial reports or statements that companies may prepare. These include the Balance Sheet, Income Statement, Cash Flow Statement, and Statement of Changes in Equity.