Monday, January 25, 2021

Financial Statements: Types, Characteristics and Objectives

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.

Financial Statements
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. Following are the main characteristics of a financial statement:


Clarity: The financial statements provide information about the financial operations based on their actual content and they are published to address the shareholders of the company.


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.

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