For stock investors, understanding how to work with the numbers in a company’s financial statements is critical. The basis for smart investment decisions is the meaningful interpretation and analysis of financial statements, statements of income, and statements of cash flows to determine a firm’s investment characteristics. Therefore, the essentials of financial statements must be kept in mind while compiling a financial statement. Scroll down and read about the necessities and the top objectives of financial statements.
- Types of financial statements
- Essentials of financial statements
- Features of financial statements
- Objectives of financial statements
types of financial statements
The four standard financial statements and the types of information they give are as follows:
Balance sheets show a company’s financial position. It includes all company assets, liabilities, and net worth at the end of a specific time frame, including a financial year, a quarter, or the three previous years.
The income statements show a company’s total earnings in a financial year or a specified period. It includes the total revenue, expenditures, profits, and losses of a company that occurred at a particular time. It is also called a profit & loss statement (P/L).
Cash Flow Statement
A statement of cash flow shows where and how money moves over time. It shows the company’s source of cash and allows you to monitor incoming and outgoing money. As a result, a cash flow statement becomes crucial in cash forecasts & short-term planning.
Statement of stockholders’ equity
It is the financial document a company issues as part of its balance sheet highlighting the changes in stockholders’ equity or ownership interest in a company for a given accounting period. The difference between a company’s total assets and total liabilities is stockholders’ equity.
essentials of financial statements
Due to the complexity of financial reporting, we must first become acquainted with the essentials of a company’s financial statements. A beginner or commoner does not understand accounting rules, principles, and traditions to comprehend financial statements. However, it is necessary to produce the financial statements in plain, non-technical language so that anyone without specialized skills or education may understand them. Here are the features of the financial statements that must be in your mind while preparing them.
easy to understand
The financial information content should be easily accessible from the company account books. If this is the case, the calculation is simple and ignores any irrelevant data in the financial statements. Furthermore, the size of a company’s financial report should not be too large.
genuine financial condition
The information in financial statements must be clear and correct, allowing the accurate financial position for reporting. It helps stakeholders make favorable & crucial decisions and meet the objectives of financial statements. In addition, the financial accounts should incorporate all relevant information.
Only via appropriate presentation can the financial statements be made more useful. Presenting these statements in a basic format makes them easier to comprehend. It would be best if you organized the columns and quantities to make it easier to compare the current year’s data to those from the prior year. Similarly, the ability to compare actual results to budgeted or benchmark results should also be easily accessible. Finally, the financial statements must be in such a way that it draws the attention of all interested parties to every piece of critical information.
The main objective of financial statements is to provide accurate data to help make complex decisions. So, the financial information you generate should help the company achieve its goals. It is feasible only if the financial statements include the necessary & relevant details.
brief and focused
Most of a company’s financial readers want to know only about the essential items because many technical numbers and mathematical operations do not make sense to them. Those readers may also include several higher management members who do not have a finance background. Therefore, producing a brief and focused copy of the statement that highlights such information or items becomes essential.
Financial statements do not require all the details, but only the most basic information is sufficient in most cases. So it is because extensive details make assessing a company’s financial status and progress challenging.
With the proper analysis, the information given in a financial statement produces several practical conclusions and highlights new accounting facts. Moreover, similar types of data can be valuable in creating correlation. Besides, you can also form logical interpretations through the analytical display.
prompt and easy calculation of accounting ratios
You should formulate financial statements so that the necessary items and statistics for calculating multiple accounting ratios are readily available. In addition, the interested parties need these ratios for accurate interpretation and analysis. Therefore, financial statements should be created and presented as soon as feasible. In a word, after the accounting year ends, you must promptly produce the financial statements.
objectives of financial statements
Financial statements play a crucial role in the successful assessment of the current status of the company as well as in predicting future scopes. These statements contain different types of information that people use in various capacities. Let’s see the objectives of financial statements:
- Provide helpful information for planning, controlling, analyzing, and decision-making within an organization
- Provide relevant data to current & prospective investors to help them make rational decisions regarding their investment
- Demonstrate brand equity to lenders and creditors to help them evaluate the company’s ability to repay the debt
- Share essential bits of information to the shareholders & public at large about the various aspects of the company
- Show how an organization is managing its resources
- Help to abide by government and corporate regulations
- Create plans for a company and make information-based decisions
Once you understand the objective of financial statements and the mandatory conditions of preparing them, it becomes clear why and how you can include relevant information in these statements. While preparing financial statements, one must comply with all the above-mentioned conditions.
You can also approach accounting and financial services providers if you need professional assistance. They can help you create better reports and even suggest valuable insights for future growth.
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