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Understanding Financial Statements

Financial statements are formal records that reflect a company's financial health and performance, essential for decision-making by both internal and external stakeholders. Key components include the Balance Sheet, Income Statement, Statement of Cashflow, Statement of Changes in Owner's Equity, and Notes to Financial Statements, each serving specific purposes in assessing financial position and performance. These statements provide insights into assets, liabilities, equity, profitability, cash management, and detailed accounting policies.

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21 views14 pages

Understanding Financial Statements

Financial statements are formal records that reflect a company's financial health and performance, essential for decision-making by both internal and external stakeholders. Key components include the Balance Sheet, Income Statement, Statement of Cashflow, Statement of Changes in Owner's Equity, and Notes to Financial Statements, each serving specific purposes in assessing financial position and performance. These statements provide insights into assets, liabilities, equity, profitability, cash management, and detailed accounting policies.

Uploaded by

mohamadcasir21
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FIN004

FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

are formal records that reflects the company’s financial health, condition,
and performance.

they are essential tools used by various stakeholders (internal & internal)
as it provides financial information for decision-making purposes.
FINANCIAL STATEMENTS

 Internal Users  External Users

 Owners  Creditors
 Managers  Government
 Employees  Investors
 Board of Directors  Suppliers
 Customers
FINANCIAL STATEMENTS

Balance Sheet
Income Statement
Statement of Cashflow
Statement of Changes in Owners Equity
Notes to Financial Statement
BALANCE SHEET

Statement of Financial Position.


it contains real or permanent accounts.
it provides and reflects a snapshot of the company’s financial position at
a given period (as of).
it shows what and how much the company owns, what and how much it
owes, and the amount invested by owner/s or shareholders.
it help stakeholders assess the company's liquidity, solvency, and overall
financial health.
BALANCE SHEET

Assets - is anything the business owns that has value and can provide future
economic benefit.
 Current – liquid
 Non-current – long-term
Liabilities - is anything the business owes. Are obligations or debts that must
be paid in the future.
 Current – obligations to be paid within a year
 Non-Current – long-term obligations
Equity - represents the owner’s claim on the business.
METHODS OF REPORTING

 REPORT FORM  ACCOUNT FORM

 Vertical format where the accounts  Horizontal format that resembles a


are presented form top to bottom. T-account where the assets are
shown in the left side and liabilities
and equity in the right side.
 Often used for modern financial
reporting.
 Traditionally used in manual
accounting systems.
INCOME STATEMENT

Statement of Financial Performance or Statement of Profit or Loss.


It contains nominal or temporary accounts.
It reflects the company’s performance over the period (for the period
ended).
It provides information about a company's profitability by showing how much
money the company earned (revenues) and how much it spent (expenses).
It help stakeholders assess the company's ability to generate profits from its
core business activities.
INCOME STATEMENT

Income - is the money a business earns from its operations.

Expenses - represent the money spent to operate the business.


STATEMENT OF CASHFLOW

provides valuable information about a company's cash inflows and


outflows during a specific period of time (for the period ended).
reconciles the cashflow with changes in its cash and marketable
securities during the period.
it helps stakeholders understand how effectively a company manages its
cash position.
generally, records 3 activities: Operating, Investing, Financing.
STATEMENT OF CASHFLOW

Operating - shows the cash generated or used by the company's core


business operations.
Investing - reflects cash flows related to investments in long term
assets.
Financing - details cash flows related to the company's financing
activities.
METHODS OF REPORTING
 DIRECT  INDIRECT

 reports operating cash inflows  reports cash flows from operating


(receipts) and cash outflows activities by beginning with net
(payments). income and adjusting it for
revenues and expenses that do
not involve the receipt or payment
of cash.
STATEMENT OF CHANGES IN OWNER’S EQUITY

shows changes in shareholders' equity over a specific period, including


contributions from shareholders, net income or loss, dividends paid, and
other adjustments. It provides insight into how a company's equity
changes over time, reflecting the impact of profits, losses, dividends, and
other transactions affecting shareholders' interests.
NOTES TO FINANCIAL STATEMENTS

are explanatory notes keyed to the relevant accounts in the statements.


provide detailed information on the accounting policies, procedures,
calculations, and transactions underlying entries in the financial statements.
common issues addressed by these notes include revenue recognition, income
taxes, breakdowns of fixed asset accounts, debt and lease terms, and
contingencies.
professional securities analysts use the data in the statements and notes to
develop estimates of the value of securities that the firm issues, and these
estimates influence the actions of investors and therefore the firm’s share value.

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