DIFFERENT TYPES OF FINANCIAL STATEMENTS A PUBLIC COMPANY RELEASES FOR ITS INVESTOR.
What is the financial statement?
Financial statements are records or business activities that are present in writing. These records are made by government agencies, accountants, firms, etc. It is recorded to make sure the precision of taxes, financing or investing purposes. There are three types of financial statements: • balance sheet • income statement • cash flow state. Financial analysts and investors depend upon this data to perform ( for a company), also plan the upcoming years for the company’s stock price. The annual report is quite important. It is a dependable source. The annual report contains financial statements. The financial statements are used by investors, market analyst and creditors to evaluate a company’s wealth and earning potential. This includes income or profit loss statement and cash flow statement. Financial statements are the summed up financial position of the entity at any given period of time. The financial statements meet the needs of the users by providing the information which may turn them into potential customers and creditors. The statement gives a summary of the revenue gains, expenses, losses and net incomes or net losses of an entity for a specific period. The statement is close to a mobile picture of the entity’s operations during this time. Items were measured by different attributes, current cost, market value, net reliable value, the present value of the future cash flow. Crucial information regarding such matters as information of long term debt, pensions, leases, income taxes. Another important part of the notes of the financial statement. The financial statements make economic decisions for a business company incredibly easy. Date, time, name of the statement are mentioned in the heading. However, these statements are never precise, it’s always the estimate. There are comparative statements as well, it is known as the two year’s financial statements. It is the report of the present year and the year after that which guides us compare the two.
The three types of financial statements are;
1.Balance sheet: The balance sheet is an overview of corporations assets, liabilities and stockholder’s equity as a snapshot in time. The data at the beginning states whether a snapshot was taken or not. Basically, it is made at the end of the financial year. The formula for the Balance sheet is, Assets =. ( Liabilities+owners equity). Now, the balance sheet can be divided into two categories that are, short term and long term responsibilities. By following the Balance sheet formula, assets should always be equal to liabilities plus the owner’s equity. Liabilities are basically the claims of creditors. Let’s discuss what the balance sheet is used for, with the balance sheet an owner can have complete control of the financial strength and abilities of a business. Balance sheet identifies the latest trends and changes, particularly in the areas where money can be received and paid. The balance sheet is inarguably the most commonly used way of giving information about the financial reports.
How to identify the balance sheet?
The balance sheet is prepared earlier; we just have to identify it.
a.Locate total assets on the balance sheet for the
b. Out of all liabilities, which should be a separate listing on a balance sheet. It may not include contingent liabilities.
c.Locate total shareholder’s equity and add the number of total liabilities.
d.Total assets should equal the total of liabilities and total equity.
Data from balance sheet.
Data from the balance sheet identifies how assets are funded, either with liabilities such as debt or stakeholders equity, such as retained earnings and additional paid in capital. Assets are mentioned in balance sheets in order of liquidity. Liabilities are in the order in which it has to be paid.
2. Income Statement: Income statements are profit and loss statements that inform a company’s revenues, expenses and net income over a period of time. This kind of statement informs about past financial year’s performance. It also analyses abilities of the future. The statement contains the money received from sale of products and services, previous expenses are subtracted. This is also known as the Top line and expenses. With subsequent net income or loss over time, due to earning activities. Net income is also a bottom line. The bottom line is a result that comes post all revenue having been accounted for. There are two methods to do this: Single and Multi Steps.
The single method includes the entire revenue, they extract the expenses to find the bottom line that is the result.
The multi method, as its name suggests it takes multiple steps to get to the end result. Firstly, operating expenses and subtracting from the gross income. This takes income from operation. Other revenues added and expenses subtracted. This yields income before taxes. The final step is to remove taxes, which ultimately produces net income or otherwise called bottom line.
3. Cash flow state: This type of statement keeps track of cash that flows in or moves out of a company. Through Cash flow state we get to determine how much cash is there in the company. So, we know how much is there to actually operate expenses. The cash flow statement also lets us know how efficient a company is in paying the cash that they are responsible for paying. Main components of the cash flow state are:
1. Cash from operating activities
2.Cash from investing activities.
3. Cash from financing activities
4. Disclosure of non-cash activities. This also prepares GAAP( General accepted accounting principles.)
These kinds of statements are not concerned with the future income and cash that will flow out. This is the key difference between a cash flow statement and the other two kinds of statements.
The cash flow statement is made by making certain changes to the net income by adding or subtracting differences in revenue, expenses and credit transactions. Non- Cash materials are included into net income ( income statements) and total assets and liabilities. That is how the cash flow is calculated.
There are two methods to create a Cash flow statement are: 1. Direct 2. Indirect.
Direct method is to add kinds of payments and receipts including cash paid to suppliers, cash recipients from customers and cash paid out in salaries. These are calculated by adding beginning and ending balances of a variety of business accounts and examining the net decrease or increase in accounts.
Indirect cash flow- They first take income off a company’s income statement. This is due to the fact that a company’s income statement is prepared on an accrual basis, revenue is basis, revenue is only recognised when it is earned and not when it is received.