What is a Financial Statement?
Financial Statements – or Financial reports – are a formal, written record of the business and financial activities of an individual or an organisation. These records should be in a structured, easy to understand form as they often need to be audited by accountants, tax firms, government agencies or potential investors.
Basic Financial Statements
The three basic Financial Statements are;
- A Balance Sheet
- An Income Statement
- A Cash Flow Statement
Financial Statement #1: Balance Sheets
A Balance Sheet reflects an individual or organisation’s liabilities, assets and equity at a single point in time. This Financial Statement is either in account form or report form, depending on the requirements. A balance sheet shows a snapshot of a company’s Net Worth at that time and is calculated as Assets – Liabilities. In the most simplistic form, it is shown with Assets on the left column and Liabilities and owners equity on the right column. Best practice is to list the Assess in order of liquidity. The two columns need to ‘match’, or ‘balance’ and the simplest formula used is below;
Assets = (Liabilities + Owners Equity)
Current Assets can be converted into cash easily, and are are classified as;
- Cash and cash equivalent
- Accounts receivables
- Pre-paid expenses for services that will be used within the year
- Accrued revenue (services rendered that are yet unpaid)
- Money lent to (less than one financial period)
- Inventory
- Real estate and property
- Intangible assets such as copyrights, trademarks, patents and other intellectual property
- Biological assets such as livestock, orchard trees, plants etc.
- Equity method Investments (associate companies, joint ventures etc.)
- Money lent to (over one financial period)
- Current and deferred tax requirements
- Loan interests on debts due
- Accounts payables
- Unearned revenue for services owed to customers who have paid in advance
- Financial liabilities such as corporate bonds or promissory notes
- Employee dues; salaries, gratuities, pension funds
- Shareholders equity (See below)
- Shareholders equity (money owed to shareholders)
- Issued capital
- Capital reserves attributed to controlling investors
Financial Statement #2: Income Statements
There are multiple names for an Income Statement – Profit and Loss Statement, Statement of Earnings, Operating Statement and Revenue Statement. Regardless of what it is called, its core function is to provide an overview of expenses, revenues, earnings per share and net income of an individual or organisation over a range of time. The statement shows if the entity made a profit or loss over a specific financial period and is used to calculate Net income using the following formula;
Net Income = (Revenue – Expenses)
Income statements can either be in a Single Step format or Multi-Step format. Single Step statements subtracts total expenses from total revenues to find the bottom line. The Multi-Step format follows the below steps;
- Calculate gross profit
- Calculate operating expenses
- Calculate Income from operations by deducting operating expenses from gross profit
- Calculate Income before Taxes by deducting all remaining expenses (foreign exchange loss etc.) from other revenues (rent, interest earned from bank savings etc.)
- Finally, deduct taxes to produce Net Income.
Financial Statement #3: Cash Flow Statements
There are multiple names for an Income Statement – Profit and Loss Statement, Statement of Earnings, Operating Statement and Revenue Statement. Regardless of what it is called, its core function is to provide an overview of expenses, revenues, earnings per share and net income of an individual or organisation over a range of time. The statement shows if the entity made a profit or loss over a specific financial period and is used to calculate Net income using the following formula;
Net Income = (Revenue – Expenses)
Income statements can either be in a Single Step format or Multi-Step format. Single Step statements subtracts total expenses from total revenues to find the bottom line. The Multi-Step format follows the below steps;
- Calculate gross profit
- Calculate operating expenses
- Calculate Income from operations by deducting operating expenses from gross profit
- Calculate Income before Taxes by deducting all remaining expenses (foreign exchange loss etc.) from other revenues (rent, interest earned from bank savings etc.)
- Finally, deduct taxes to produce Net Income.
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