Financial Statement or financial report can be understood through the basic definition of a kind of formal record that hold information about financial activities along with the business position. The position can be of a persona or any other entity as well. Any financial information relevant to that particular entity to time period is presented in the report. The presentation style is highly structured and easy to understand format. Financial reporting generally encompasses analysis and discussion by the management as well.
A statement of financial position can also be termed as a balance sheet. The statement would basically report about the following at a given point in time:
Assets of the company
The income statement is also referred to as the statement of comprehensive income. Another name for the income statement is the statement of revenue and expense. Other titles include:
Profit and loss report
Report on income of the company
Expenses and profits
This particular statement is basically used to provide information on the enterprise’s operations. The operations generally comprise of the company/organization’s sales along with the different expenses which are incurred during that particular time period. An equity statement is as obvious as its name. The statement basically comprises of the changes incurred in the equity of the company. It offers information about the retained earnings and is also termed as the statement of retained earnings. It reports the changes in total equity of the company during a particular period of time. The annual reports comprise of full detailed information of the entire year.
The cash flow activities are reported through the statement of cash flows. It offers information about the general cash flow activities specifically the operations, investment and financial activities. When it comes to large corporations, statements of such can be rather complex. These tend to consist of an extensive list of footnotes attached to the financial statements in order to increase the general understanding of the annual report. The footnotes comprise of the respective discussion and analysis by the management as well. These notes generally describe in detail each item presented on the income sheet, cash flow statement and the balance sheet in added detail. The notes attached to the financial statements are regarded as an integral part of the statements.
Purpose of financial statements by business entities
The entire point of financial statements is to offer information regarding the financial performance and position of the company. The changes recorded and observed in the position are also stated in order to enhance the understanding of economic decisions to be made. The financial statements are supposed to be following:
The financial statements should report information regarding the following:
Expenses (directly linked with the organization’s position)
These statements are basically intended to be quite understandable by the general readers. The criterion is that anyone with a reasonably sound knowledge of the basics of that particular business along with its economic activities and accounts should be able to understand the statements. The person should be able to read the information with due diligence. The financial reports can be used for many purposes inclusive of the following:
Financial statements are required by owners and managers for the purpose of important decision making related to the business. These are supposed to affect the continued operations of the organization. A thorough financial analysis is carried out on the statements in order to offer the management a detailed understanding of the provided data. The annual reports offered to the stockholders also consist of these financial statements.
These financial reports are also required by the employees for the purpose of creation of collective bargaining agreements. These are created with the management when it comes to labor unions and purposes such as rankings, promotion and compensations.
The financial reports are utilized by prospective investors as well. These individuals require such information for assessment of the viability of investing in that particular business. The financial analyses prepared by the professional bodies are used by these investors for enhances assessment and for improved decision making in terms of investment.
Financial institutions such as banks along other companies which offer loan make use of such reports in order to decide lending of money. They make use of the financial statements to understand the working capital and the extended debt securities of that particular organization.
Consolidated financial statements
The consolidated financial statements are basically a kind of financial statement. These are created by a group in which the parent company presents the following along with its subsidiaries:
These are presented as a single entity. The statements are created according to the standards set by the International Accounting Standard and International Financial Reporting Standard.
Government financial statements
The statements should be obvious from the name. These are the financial statements prepared by the ruling government. However it should be noted that the rules applied to the government for the recording and measurement of the statements followed by their presentations is quite different from the standards set up for the business financial statements. The non-profit organization rules of financial statements are different from these as well. The government is required to use the following two methods when it comes to the method of accounting:
Combination of the two
Personal financial statements
The personal financial statements are restricted to individuals. These are not to be provided by organizations regardless of the size of the company or other entity. The personal financial statements are required to be presented by individuals looking to apply for financial aid of any kind or personal loan. Generally speaking an individual presenting a personal financial statement offers information about the held liabilities or debts along with the current assets. The sources of income and expenses are both clarified in the statements as well. The information required and kind of form to be filled out is entirely dependent upon the organization being requested for loan or financial aid.
Audit and legal implications
Laws tend to be different for various countries. Laws and implications regarding the audit are dependent upon the country and its legislature. However the general nature of an audit of the financial statements provided by a public company includes requirements such as that of information relating to investing, tax and financing of the company. Audits of such are generally performed by accountants working independently or by professional auditing firms. The audit report basically comprises of a summarized report of the results of the company’s audit. The fairness and accuracy of the company’s financial statements are recorded in this particular report. The opinions about the financial statements are generally mentioned in the annual report.
When it comes to liability of the auditor not a lot can be said with surety. A lot of legal debate has been carried out on a global level as to who the auditor should be liable to. Though if common sense is to be considered the shareholders are to be considered by the auditors while carrying out this critical process as the audit reports are basically addressed to the current stockholders of the company/organization. However it is not necessary for this to be the case in terms of what is decided by the common law precedent of the particular country. For instance if you consider the example of Canada; the auditors are essentially liable only to the investors that are utilizing a prospectus in order to purchase the shares in the market. However in the United Kingdom things are slightly different.
The auditors are liable to the investors with potential. The auditors are required to keep in mind the information to be used and the manner in which it will be interpreted by the potential investors. Today’s auditors are habitual of including liability restricting language in their reports along with discouragement of anyone other than those to whom the report is basically addressed to. Liability is a real life issue and the UK offers auditors absolutely unlimited liability. If you consider the functions of United States then the accuracy of financial statements is quite stressed upon. USA holds the corporate officers that are the CEO and the CFO responsible for the accuracy and justness of the financial reporting.
Standards and regulations
When it comes to regulations there is no strict rule or code. Various countries tend to have their own personalized versions of accounting principles which might have been created keeping the international companies in consideration along with their activities. However a set of rules and guidelines is utilized by the companies offered by the government in order to guarantee a sense of uniformity and comparability in terms of the financial statements offered by an array of different companies operating in the country. The most commonly used guidelines are of the GAAP during the preparation of financial statements. GAAP basically stands for Generally Accepted Accounting Principles.