Financial statement is prepared by the management and record all financial activities for the whole accounting year to state how well financially a company performed that year. This is the main part of the company’s annual report to reflect the financial effects of business transactions and events of the entity.
A financial statement includes three most important things:
- Balance sheet
- Income Statement
- Statement of Cash Flows
Balance Sheet – First Part of Financial Statement
Balance Sheet is a part of financial statement presented by the management in a specific form to state the position of company’s assets and liabilities on a particular date i.e. the year end date.
Balance sheet is based on a mathematical equation called “accounting equation”:
Asset = Liabilities + Owner’s Equity
Its presented in different forms based on the legal requirements of a company. Now day’s companies are following the vertical presentation of balance sheet. We will be covering this in later part.
When you will look at a balance sheet, you will see two major parts in it presented in a specific form and on the top, it would have written “Balance Sheet as of “the date” ”;
- Assets – It list down all type of assets like cash, accounts receivable, inventory, plant and machinery, building and investments etc.
- Liabilities – these are the debts that a company owes to outsiders.
A balance sheet is always presented as on date mentioned on the top of the balance sheet. That means it states the companies position as of that particular date. In a financial statement, balance sheet date will be always be the end of the year. Because, that is the date up to which the financial statements are prepared.
Format of Presenting a Balance Sheet
A typical balance sheet is presented on the basis of traditional accounting system having assets on the left hand side and liabilities on the right hand side. (for some countries the liabilities are on the left hand side and assets are on the right side). But while presenting it in an annual report the format should be as per the statutory requirement. Presently all companies present balance sheet in vertical form.
Income statement – Second Part of Financial Statement
Income statement is also known as profit and loss statement and it reflects the transactions carried out during the financial period. In a financial statement, it states whether the company has made profit or loss during the financial year.
A comparative form which compares the current year income to the past income also presented in income statement. The key things presented in this statement are;
- Sales of the company
- Cost of Goods Sold
- Indirect Expenses incurred by the company
- Net profit or Loss during the year
Cash Flow Statement – Third Part of Financial Statement
Cash Flow is given in a financial statement in addition to the balance sheet and income statement. In a financial statement, it shows whether the company is generating enough operational cash flow and what are the other source of cash flow from financing and investment activities. The total cash flow of this statement should tally with the cash balance shown in balance sheet.