A company’s financial statements are a group of reports that show its financial performance and general business activity over a particular period of time. The financial statements are intended to give a true and fair view of this information and as such, most sets of financial statements tend to be audited, which gives assurance that they are true and fair in the opinion of the external auditor.
It is very common, within the industry, for financial statements to be referred to as a company’s “accounts” and this is the a term you will hear very often as they are perhaps the most important piece of work a finance team will pull together.
What are the Main Types of Financial Statement?
The most common types of financial statements are:
- The Income Statement
- The Balance Sheet
- Statement of Cash Flows
- Statement of Changes in Equity
There are other types of financial statements but those covered above are the main type and understanding these is a crucial requirement for accountants.
What Period do Financial Statements Cover?
The most common period for financial statements to be drawn up over is 12 months. There are occasions in which the the financial statements are made up to a period longer than 12 months or sometimes shorter but in the vast majority of cases they will simply cover 12 months. The period to which they are drawn over is known as the “accounting period” and the last day in the period should remain the same from year to year in order to allow the financial statements to be compared to prior periods.
Who Prepares the Financial Statements?
Although is it is common for the accounts to be audited, it is important to understand that the auditors are not actually responsible for preparing these. It is the sole responsibility of a business’ management to prepare the accounts in a true and fair manner. The auditor is only there to review the information management puts together for them rather than putting the information together themselves.
The finance team for the business should maintain accounting records for the year and will most likely prepare management accounts on a more regular basis than the year-end accounts. These will normally be prepared on a monthly basis and are a more condensed version of the information that will go into the final report at year end. Management can use these to monitor the financial performance throughout the year
What does Each Type of Financial Statement Show?
Since, we have summarized the main types on financial statement, it would be useful to understand what each one of them shows. Of course clicking each of them will take you to a post where we take a much more detailed look at the statements but the summary below will give you a basic understanding.
The Income Statement
Ultimately displays the profitability of the company for the year. It does this by taking the total revenue for the period and reducing that by any expenses incurred in the year. The gross profit is also displayed by showing the total revenue minus the cost of sales. The income statement is a good indicator of the business’ ability to produce a profit and is an important report for investors to review.
The Balance Sheet
The balance sheet provides a snapshot of the company’s assets and liabilities at the period end. The structure of the balance sheet allows the person viewing it to see the long-term and current assets of the business as well as the long-term and current liabilities of the business.
As well as the assets and liabilities of the business, the balance sheet also shows the equity the owners have in the business as well as other items such as share capital.
The balance sheet is also a great way to see the accounting equation being put it into practice as the balance sheet will not balance unless the accounting equation has been applied. This makes preparing a balance sheet one of the best forms of practice for beginner accountants to check their understandings of the double entry system.
The Cash Flow Statement
The purpose of the cash flow statement is to show the true amount of cash inflows and outflows over the period of the financial statements. The reason for this is that the profit for the year is not always an indicator of the amount of cash generated in the year.
For example, the depreciation charged on fixed assets is not actually a true expense. Although it decreases the profit for the year, it does not actually involve any cash being paid out of the company.
Therefore, the statement of cash flows considers all of the non-cash revenues and expenditure to get to the final figure of the true amount of cash which the business has either generated or spent.
The Statement of Changes in Equity (SOCIE)
The SOCIE displays any movement in the equity of the business within the year. Any profit for the year is added to the opening retained earnings and this is then reduced by any dividends paid.
The SOCIE also allows the viewer to see any changes in share capital and more complex items such as a revaluation reserve.
Summary
We have now discussed the basics of financial statements and this will provide a great base for anyone who is new to accounting to build their knowledge from.
If you are interested in knowing more about auditing you can check the official website for the Financial Reporting Council here. Otherwise we have produced more articles regarding auditing in the “auditing” section of The Online Accounting Guide such as a guide to Audit Walkthroughs.