FINANCIAL STATEMENTS: CONCEPT, CHARACTERISTICS, TYPES, EXAMPLES - DUDAS - 2025

The financial statements are an accurate picture of the financial affairs of a company in a given year. They are prepared using financial information compiled by the company's accounting analysts. They must be reported following established accounting principles and be standardized for compliance at all levels.

Financial statements are done systematically. They are a written summary of all the values ​​of the ledger accounts, displayed to provide a clear view of the financial position, profitability and performance of a company.

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They are prepared at the end of the accounting period, which is generally one year, and are then audited by an auditor to verify their accuracy, transparency and fairness for tax and investment purposes.

Mastering financial statements is the first step to achieving business objectives, whether you want to enter new markets, develop a new product, or sell and move on. This way you will have the numbers to support decisions.

What are financial statements for?

They are the means for organizations to reveal their history. There are four basic financial statements that all companies must develop. Together they reproduce the strength and profitability of an organization.

The income statement is the financial statement that shows the benefit of an organization. The statement of cash flows discloses the cash income and expenses of a business over a period of time.

The balance sheet reveals both the financial condition and the solvency of an organization. On the other hand, the statement of equity indicates the variations in the retained earnings that exist for a certain period, for example, a quarter or a semester.

These statements are especially important when asking someone to invest in the business. You will have to show how the business makes money - financial statements are how you show it to them.

Concept

Although each financial statement is treated separately, they are all related. Changes in assets and liabilities seen on the balance sheet are also reflected in income and expenses seen in the income statement, resulting in the company's profit or loss.

Cash flows provide additional information about the cash assets listed on the balance sheet and are related, although not equivalent, to the net earnings shown in the income statement.

No financial statement tells the whole story. However, when they come together they provide investors with very powerful information. This is the best instrument investors have when it comes to investing wisely.

- Aspects they contain

Recorded data

This is the information gathered from the accounting records. These accounts (debtors, cash account, fixed assets, creditors, etc.) are kept at historical cost or original cost. Marketable value is not recorded.

Accounting principles

In preparing these statements, certain accounting principles, standards and methods are followed. These are reflected in the financial statement.

The integration of such accounting principles makes the financial statement uniform, more reliable and also comparable.

Personal judgment

Although accounting principles and assumptions must be followed, there are certain things that are left to the judgment of the accountant: provisions for debts, deferral expenses, the inventory calculation method (LIFO, FIFO, etc.). These decisions of the accountant will be reflected in the financial statements.

Importance

They are comprehensive reports on the health of the company, taking into account cash flow, income and balance sheet.

Financial statements determine if a company has the ability to pay loans, if it has the cash flow to meet invoices and buy shares. It will also tell where the business is generating cash from and where that cash is going.

They indicate whether the business is profitable, whether it will continue to be profitable, and whether major problems arise, such as a continued drop in sales over time.

Reading the financial statements will give an overview of the condition of the business and if there are warning signs of possible future problems.

A bank or other similar institution will consider financial statements as the first indicator of how the business is doing and whether further research is needed.

characteristics

Relevance

The information provided by the financial statements must be relevant to user requirements. Although shareholders are the primary recipients of these statements, there are other stakeholders who rely on these statements during their decision-making process.

For example, fund-providing institutions (banks, finance companies, etc.), potential investors, providers who are evaluating the credit rating, etc.

Therefore, the information provided in these financial statements must be relevant to the information needs of all these stakeholders, as it could affect their decisions.

Understandability

Financial statements are published to address the shareholders of the company. Therefore, it is important that they are prepared in such a way that they are easy for shareholders to understand and interpret. The information provided in these statements must be clear and legible.

For the sake of understandability, management should consider not only legal data, but also voluntary disclosures of information that would make the financial statements easier to understand.

Comparability

The financial statements should be prepared in such a way that they are comparable with the statements of the previous year. This feature is very important to maintain as it ensures that the performance of the company can be monitored and compared.

This characteristic is maintained by adopting accounting policies and ensuring that the standards applied are consistent from one period to another and between different jurisdictions.

This allows users of financial statements to identify trends and patterns in the data provided, facilitating decision making.

Reliability

The information provided in the financial statements must be reliable and true. The data obtained to prepare these financial statements must come from reliable and honest sources. They must represent a true and fair picture of the company's situation.

This means that the information provided must not have any eloquent errors. The transactions shown should be based on the concept of prudence and represent the true nature of the company's operations.

Critical areas of a subjective nature must be presented with due care and with great skill.

Opportunity

All information in the financial statements must be provided within a peremptory period of time.

The dissemination should not be unduly delayed so that, when making financial decisions, the users of these statements can have all the relevant and updated knowledge.

Although this feature may require more resources, it is a vital feature, since late information makes corrective reactions irrelevant.

Financial statements of a company

Financial statements are the combination of three reports about a business. They will contain the cash flow statement, the income statement and the balance sheet of the company. All three together produce an overall picture of the health of the business.

goals

The main purpose of financial statements is to inform shareholders about the financial performance of the company. This is because the shareholders are the true owners of the company, but the company is managed and managed by the directors. The objectives are:

- Determine the financial position, profitability and performance of the company.

- Determine the inflows and outflows of cash.

- Know the results of the commercial operations of the business.

- Provide information related to the financial resources and obligations of the company.

- Reveal accounting policies.

- Verify the efficiency and effectiveness of the company's management.

Preparation of financial statements

Each business will prepare financial statements to go with its year-end results to provide stakeholders with an overview of how the business is performing.

If a business is looking to increase credit facilities with a bank or is trying to raise capital for an expansion, it will produce financial statements for the end of a fiscal quarter or the most recent month.

When preparing financial statements for such purposes, the best practice is to use general accounting language, which is understood by all parties. A financial statement that can accompany a year-end report to be read by employees is often familiar only to those involved.

Often times, a government body can request a financial statement for tax purposes. The company will need to produce a high-quality one using generally accepted guidelines.

A bank or investors can also request a financial statement without prior notice, if they are concerned about the profitability of the business.

For this reason alone, it is essential for any organization to keep good, up-to-date records so that financial statements are quick and easy to produce.

Types of financial statements

Balance sheet

Provide a photograph of the assets, liabilities, and shareholders' equity. The equation to remember when preparing a balance sheet is: Assets = Liabilities + Equity.

Under current assets, cash and its equivalents, inventories, accounts receivable, etc. are considered. Equipment, vehicles, buildings, etc. are placed as non-current assets. A sequence is followed, from the lines of greatest liquidity to least liquidity.

On the other hand, as current liabilities are considered promissory notes, accounts payable, tax payable, pending wages, etc. A non-current liability is considered long-term debt.

Accountants must ensure that total assets always equal total liabilities plus shareholders' equity.

Statement of income

The income statement deals with income and expenses. It starts with gross income or sales. Any rebates or sales discounts are then deducted to obtain net sales.

Net sales deduct the cost of merchandise sold to obtain gross profit.

Operating expenses, such as administrative expenses, are deducted from the gross profit. By deducting operating expenses, you get the profit before interest and taxes (EBIT).

Tax and interest charges paid for the period are deducted from EBIT, thus obtaining net income, which is profit after taxes.

Cash flow statement

There are three separate statements in a cash flow statement. These are the cash flow from operating activities, the cash flow from investing activities, and the cash flow from financial activities.

Cash flow from operations is the cash generated from the principal operations of the business. It shows the use of cash for the operation of the organization.

Cash flow from investing activities deals with cash inflows and outflows related to investments, such as the purchase of property, equipment, or other investments.

The cash flow from financing activities is related to the inflows or outflows of cash corresponding to debts or to the equity of the company. It includes the raising of capital or debt, repayment of loans, repurchase of shares and others.

Statement of changes in equity

It is a financial statement that provides the synthesis of the change in shareholders' equity during a given period.

Common stocks are the most important component of net worth. Common shareholders are the owners of the company.

When the company receives a premium on the shares it is called paid in additional capital.

Retained gains or losses are accumulated from the previous period. Retained earnings are the amount the company keeps after paying the dividend.

Treasury shares are the sum total of all common shares that the company has bought back.

Examples

Suppose you have the financial data of the company ABC Corp. to prepare several examples of financial statements:

Statement of income

Summarize the income, expenses and costs of a company incurred during a specific period.

The profit and loss statement is the only report that generally receives the most attention, since the goal of any business is to make a profit.

Net profit is the result after deducting cost of goods sold, general expenses, interest and taxes. The following is an example of ABC Corp's profit and loss statement:

Balance sheet

It is a list of the assets and liabilities of a company on a specific date. The equity portion contains all the contributions of the company's investors and retained earnings. ABC Corp.'s balance sheet would look like this:

Cash flow statement

Summarizes cash and cash equivalents going into and out of the business operations of an organization. It is different from the balance sheet and the income statement because it only records the cash activities of operations.

The construction of the cash flow statement begins with the company's earnings and then adjustments are made for changes in current assets, investing activities and financing.

Depreciation is an item that is not cash and is added back to net earnings in the cash flow statement. The following is an example of ABC Corp's cash flow statement:

References

1. Wall Street Mojo (2019). Financial Statements. Taken from: wallstreetmojo.com.
2. S. Securities and Exchange Commission (2007). Beginners' Guide to Financial Statement. Taken from: sec.gov.
3. Lumen Learning (2019). Financial Statements. Taken from: courses.lumenlearning.com.
4. Business Jargons (2019). Financial Statement. Taken from: businessjargons.com.
5. Shopify (2019). Financial Statement. Taken from: shopify.com.
6. Accounting for Management (2019). Qualitative characteristics of financial statements. Taken from: accountingformanagement.org.
7. Toppr (2019). Financial Statements. Taken from: toppr.com.
8. Jim Woodruff (2018). Examples of an Accounting Financial Statement. Small Business-Chron. Taken from: smallbusiness.chron.com.