What are Financial Reports?
Company Financial Reports are the formal statements of the financial performance of a business. Financial Reports are a vital component of accounting, a method of explaining financial information. In other words, Company Financial Reports are a written record of all the ledger account heads that provides a clear picture of the financial health, profitability, and overall performance of the organization.
Any Public or Private Company Financial Statements are meticulously maintained and prepared at the end of the fiscal year. This Annual Report of a company is then audited to verify its authenticity for taxation and investment purposes.
There are mainly three Company Financial Reports that are prepared during an accounting cycle. They are:
- Balance Sheet
- Income Statement
- Cash Flow Statement
These three Company Reports combined is commonly known as a Financial Statement. Its objective is to communicate a company’s financial aspects to external entities, including investors, creditors, tax officials, shareholders, etc.
This article will focus on the features, objectives, and the three types of Company Financial Reports and their uses.
- Company Financial Reports are official documents conveying an organization’s financial performance to external parties such as the management, investors, and tax authorities.
- A Financial Statement generally comprises three key components: Balance Sheet, Income Statement, and Cash Flow Statement.
- The Balance Sheet contains a view of the assets, liabilities, and equities over a time frame.
- The Income Statement records an entity’s profits and losses and reports the amount of money the organization made or lost.
- A Cash Flow Statement logs the flow of cash in and out of business.
Features of Financial Statements:
Following is a list of some of the fundamental features of Company Financial Reports:
- Financial Reports are prepared at the end of a financial year. However, Quarterly Results of companies are also prepared for the benefit of the business.
- Financial Statements are a combination of factual data and opinions.
- These reports show the actual financial situation of an entity based on historical transactions.
- Financial Statements reveal the current economic & business performance of an enterprise.
- A personal view of the accountants often impacts the Financial Statements.
Objectives of Preparing Financial Statements:
Company Financial Reports reveal the actual state of an entity’s business performance. In other words, the Financial Statement of a Company is the principal source of information to the stakeholders concerning a company’s profit and loss situation during a specific time frame and its financial position at the end of that term. Thus, these Financial Statements help the stakeholders make informed decisions regarding the company’s future plans.
Here are some objectives of Financial Statements:
- Any Private or Public Company Financial Statements portray an accurate condition of an organization’s assets and liabilities. Usually, this information is not available to external parties otherwise.
- The Annual Reports of Listed Companies help in determining a company’s ability to gain profits. Accordingly, the stakeholders can make the right call about the company’s finances.
- The statements also show the efficiency of the organization’s management.
- Additionally, these Company Financial Reports disclose the accounting policies in detail, which help external entities better understand the statements.
- The cash flow situation of the company is also recorded in these Company Financial Reports. Thus, it becomes easier for investors and creditors to calculate the organization’s cash requirements and liquidity.
Different Components of a Financial Statement:
Annual Reports of Indian Companies and other countries are among the most important sources of accurate audited financial data, including its financial statements. Financial analysts and investors use Financial Statement information to assess an organization’s performance and predict its earning potentials.
The three main Financial Statement components are the Balance Sheet, Income Statement, and Cash Flow Statement. Each of these Financial Statements plays a different role in understanding the financial health of the company.
Here are the three types of Financial Statements:
1. Balance Sheet:
A Balance Sheet shows the financial status of a concern as on a specific date. This form of Company Financial Reports is usually prepared at the end of the fiscal year.
Balance Sheet Formula: Assets = Liabilities + Equity
Balance Sheets report the following components:
- Assets: The number of resources owned by an entity is known as assets. They can exist in both tangible and intangible forms. Assets help to build the valuation of a business and enable future inflow of funds.
- Liabilities: The resources owned by an organization in financial terms are known as liabilities. Liabilities need to be cleared by the organization to run its business smoothly. If the liabilities are not fulfilled within a stipulated time, the company can face penalties, lose reputation, or even cease to operate. There are two types of liabilities: short-term liability, settled within 12 months, and long-term liability, paid after 12 months’ time frame.
- Owners’ Equity: The number of resources that an organization owes to its owners or stakeholders is known as the owner’s equity. Equity is equal to the difference between assets and liabilities that the organization owes to external entities.
2. Income Statements:
The Income Statement is usually the first place for an investor or an analyst to scan through. Income Statements are among the three important Financial Statements that cover a specific time frame, unlike the Balance Sheet. This Statement summarises the company’s net income, revenues, expenses, and earnings per share.
Income Statement Formula: Net Income = Revenue – Expenses
Key Features: - Recorded over specific time frames such as 1 Quarter, 1 Year, Year-to-Date, etc. - Reveals the income and expenses of a company - Helps in calculating profitability
3. Cash Flow Statement:
The Cash Flow Statement records a company’s cash situation. It evaluates how promptly the firm can produce cash to fund its operational expenditures and investments or pay off its liabilities. The Cash Flow Statement completes the Balance Sheet and Income Statement.
Key Features: - Indicates the rises and drops in cash - Like Income Statement, Cash Flow Statement is communicated over a time frame - Negates all accounting principles to disclose pure cash transactions - Consists of three parts: cash from financing, cash from operations, and cash used in investing - Gives a complete picture of the net change in the cash flow within the given time frame
What are the Uses of Financial Statements?
There are various important purposes of Company Financial Reports. To begin with, they reflect the real condition of the firm. They also assist in making crucial financial decisions. These statements are used by several entities, including investors, creditors, tax authorities, shareholders, etc.
Let us look at a few uses of Financial Statements:
- Tax Purposes: Company Financial Reports are used by Government agencies to ensure you pay your share of taxes.
- Presenting Financial Situation: Financial statements like Balance Sheets demonstrate a complete view of an entity’s assets, liabilities, and equity components that helps potential investors to evaluate the company before investing.
- Analyzing Cash Flow: A company requires a Cash Flow Statement since the Income Statement does not provide direct information on the cash transaction. Investors can review the Cash Flow Statement to analyze whether the company has adequate cash for expenditures.
- Distributing Shareholder Equity: The Equity Statement records the changes to the different equity components like retained earnings over a time frame. Shareholder Equity signifies a company’s net worth. If the Shareholders’ Equity increases due to expanding retained earnings rather than increasing shareholder base, the return on investment for existing shareholders increases.
- Decision-Making and Planning: Analysing financial statements is vital before you make a business decision. The management can take a call regarding business based on the value of the assets.
We can conclude from the above points that Company Financial Reports are vital for the entity’s different stakeholders. Financial Reports include relevant company information that is utilized by various stakeholders for a variety of reasons. Financial Reports may sometimes seem overly complicated for larger companies, but the reports’ massive benefits surpass these difficulties. A stable Company Financial Report system creates healthy competition across industries and enables capital inflows. In the long run, the process enhances economic development.