Financial statements are written records of business activities and the financial performance of a company. And this report includes the income statement, the balance sheets, the statement of net worth changes, and the cash flow statement.
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| Financial Statements: Types, Characteristics and Objectives |
What are Financial
Statements?
Financial statements are a
collection of summary-level reports that convey the business activities and the
financial performance of a company.
Financial statements are one of the most basic elements used to clarify the financial condition of companies, institutions and organizations.
The financial statements are based on logical procedures and aim to convey information about most of the financial components. They show information about a specific moment or may contribute to clarifying a set of financial operations during a certain period.
The preparation of financial statements is the first step in establishing a financial management system, as financial statements must be prepared on a monthly basis, in order to be able to manage proactively.
Types of Financial Statements
The financial statements are divided into the following types:
Income statement: An
income statement is a list that contains all profits, losses, expenses,
and revenues of the organization.
Revenue is all money
earned as a result of a group of business operations. As for the expenses, they
are the costs or money spent in exchange for the institution obtaining
something.
The nature of the expenses is related to the ability to generate revenues.
Balance Sheets: A balance
sheet is a financial list that contains all of the assets, liabilities,
and shareholders' rights in private or public companies.
The value of the assets
must be equal to the value of the liabilities to which the ownership rights are
added.
Assets are divided into
two type: current assets and non-current assets. While liabilities are broken
down into two main categories: current liabilities and noncurrent or long-term
liabilities.
Equity in the corporation constitutes the total shareholders' equity in the capital.
Cash flow statements: A
cash flow statement is a list that shows the nature of money in the
institution, and it contains a group of items that affect the financial balance
in it.
And its first section
includes all operational activities that explain all financial movements inside
and outside the institution, and it contains net income and the changes that
appear on most private accounts in the balance sheet list.
It also contains the investment activities that show the money incoming to the institution. The financing activities clause constitutes all cash inflows, inbound and outbound, related to money bills.
Statements of
shareholders' equity: Shareholders' equity is the corporation's owners'
residual claim on assets after debts have been paid.
Owners Equity Statement is
a financial report that contains all changes in ownership rights, such as
buying and selling shares, financial profits and losses, and profits arising
from issued shares.
Shareholder equity is part
of the balance sheet that represents the capital received from investors in
exchange for shares (paid-in capital), donated capital and retained earnings.
Shareholders' equity represents the share of current shares kept in the book by equity investors in the company, and it is calculated either by subtracting the company's total assets from its total liabilities or by adding equity capital to retained earnings minus the treasury shares.
Characteristics of Financial
Statements
The financial statements
have various characteristics.
Clarity:
Comparability: The financial statements provide comparability and the possibility of comparison with the aim of determining the trend analysis of financial statements and evaluate performance.
Materiality: The financial statements contain all the important elements that affect the decision-making process.
Relevance: Financial statements provide assistance to decision-makers in companies. The information contained in the financial statements must be relevant to the needs of its users.
Reliability: It is the truthfulness of the information contained in the financial statements, which is far from being influenced by the personal thoughts and ideas of those responsible for preparing them. Reliability also includes the application of information integrity, caution, prudence, and honest representation.
Timeliness:
All information contained in the financial statements must be submitted within
a relevant period of time.
Disclosures should not be delayed or excessively late so that users of this data while making their economic decisions, have all relevant and updated information.
Objectives of Financial
Statements
The objectives of the financial statements focus on the following matters:
⇒Paying attention to all
groups associated with the financial statements, especially current and
protential investors and creditors. These are among the most important people
who follow the financial statements.
⇒Tracking information that
helps estimate the size and degree of risk affecting the future cash flows
generated by the company.
⇒Measuring the changes in
liabilities and the resources associated with the entity’s income through the
income statement. This contributes to providing the best way to forecast future
cash flows compared to actual cash flows.
⇒Providing reliable
information on the economic elements of companies with the aim of measuring the
places of weakness and strength, and knowing the sources of investment and
financing.
⇒Providing information
about apparent changes in total resources resulting from profit-oriented
activities with the aim of knowing the expected returns from investment,
determining the extent of the facility's ability to pay its debts to suppliers
and creditors, and demonstrating its ability to pay its taxes.
⇒Following up on changes
affecting liabilities, assets, rights of property owners, and capital, linking
them to a specific period of time, and then classifying them into a group of
classifications, such as losses and profits.
⇒Expressing all components
of the financial statements using monetary units, because they are the general
and basic units used in the financial measurement.
⇒Disclosing all information appropriate to the needs of individuals who use the financial statements.
Conclusion:
Financial statements include three primary types: the balance sheet, income statement, and cash flow statement. Each serves a distinct purpose, with the balance sheet detailing assets, liabilities, and equity at a specific point in time; the income statement summarizing revenues and expenses to show profitability over a period; and the cash flow statement reflecting cash inflows and outflows.
Key characteristics of financial statements are accuracy, relevance, and transparency, ensuring stakeholders can trust the information provided.
The main objectives are to offer insights into a company's financial performance and position, facilitate informed decision-making, and ensure regulatory compliance.
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