Meta: Financial statements are surely a familiar phrase to businesspeople. But some may not have comprehended what is deep inside this term. Let’s dig in to find out!
Intro
The preparation of financial statements is very important and necessary in the operation and development of the company. Looking at a financial report, investors can know the performance of that company in a quarter or a year. From there, it is possible to make appropriate investment strategies and plans.
Financial statements give a whole operation during a span of a certain time – image source: pxhere
Also, financial statements show the performance of rival companies in the same industry. This key factor will offer you a reliable base to evaluate counterparts’ potential, thus making positive business plans for the future.
What Are The Financial Statements?
Financial statements are the quantitative description of the financial position of a business. Businesses can track past financial activities by preparing and analyzing this report.
Financial statements are super critical to all businesses – image source: pix4free
Financial statements organize a company’s financial transactions, showing how much money the company has made or lost, the structure of its assets and liabilities, and where the cash flows are coming from. This report also helps businesses perceive differences from competitors and compare them with industry averages.
Types Of Financial Statements
Based on the content of reflection, there will be two types:
- Consolidated financial statements offer a summary of the entire financial position and business. This report includes the managing parent company and its subsidiaries in the common ecosystem.
- The separate financial statements represent only the financial and business position.
Classification according to the time of making the report will be two types:
- Annual financial statements are made and calculated according to the calendar year or annual accounting period, guaranteed to be 12 months after the announcement of the tax authority.
- Interim financial statements are a type of report prepared for the four quarters of a financial year and semi-annual financial statements.
All Elements Of Financial Statements
Regarding a full detailed of financial statements, it will consist of four crucial contents:
Balance Sheet:
The balance sheet summarizes and generally reflects the situation of all organization’s existing assets and capital sources. It manifests the financial resources of the enterprise through the data on the value of assets and capital up to the reporting time.
A typical example of a company’s balance sheet – image source: wikimedia
These figures help demonstrate the right to manage and use the business with assets and legal responsibility to the state, investors, and shareholders.
If prepared by financial institutions such as banks, this report will have its standards in presentation. New learners need to distinguish clearly to avoid confusion, especially assets and receivables, and write “debit” as well as “credit”.
Business Performance Report
This content in the financial statement allows the reader to know the revenue, expenses incurred, net income, profit, or loss for the period. It also displays the future operating trend of the business through a dividend distribution.
If the rate of retained earnings is high instead of being distributed to shareholders, it means that the organization is looking to expand and develop investment.
Business performance report is an indispensable part in financial report – image source: pxhere
The accounting department of the enterprise will prepare the financial statement with two important parts:
- Showing profit and loss in the period: Revenue, excise tax, discount, trade discount, cost price goods sold, circulation costs, management expenses, trade discount provisioning deductions, etc.
- Reflecting the performance of obligations to the state: taxes paid, social insurance, health insurance, economic fees incurred for trade union activities, fees, etc.
The analysis and reporting of business activities presents the increase and decrease of each item at the beginning and the end of the year. In addition, analysis is performed by comparing items with total sales to determine the appropriate structural ratio.
Statements Of Cash Flows
This report shows the cash inflows and outflows for a specific period. The accrual method of accounting is useful for the accounting department to prepare the cash flow statement. This method includes the part of the revenue that the business intends to receive but has not yet realized.
A sample detailed cash flow report each month – image source: wikimedia
Notes To Financial Statements
This item is attached to the financial statements and cannot be separated. Enterprises utilize this element to analyze the information and data presented in the three reports in detail.
Notes to the financial statements will present the information and basis of the financial statements, selected accounting policies, and some additional material information.
The Compulsory Principles When Making Financial Statements
The preparation and presentation of the financial statements must comply with the provisions of the accounting standard “presentation of financial statements” and other relevant principles.
Principle 1: Accrual Basis
Financial statements should go in line with accrual accounting principles, except for information related to cash flows. All transactions related to assets, liabilities, owners’ equity, revenue, and expenses must be recorded in the accounting books, not the actual time.
Making financial statements following accrual accounting principles – image source: pix4free
Adhering to this principle helps to transparently outline the financial position of the business in the past, present, and future.
Principle 2: Consistency
Enterprises must apply the accounting policies and methods for at least one annual accounting period. The presentation and classification of items in the financial statements must be consistent unless there is a significant change in the business’s activities.
To be more detailed, when it is necessary to adjust the presentation of transactions and events to be more reasonable, the change in accounting standards, the alteration in the presentation of financial statements, the businesses must explain clearly in the reports.
Principle 3: Continuity
When preparing financial statements, an enterprise needs to assess its ability to continue. Based on the assumption that the enterprise will continue to operate normally for the foreseeable future, the company proceeds to make appropriate financial reports.
The FS needs to evaluate the continuity ability of an enterprise – image source: investing-network
To evaluate the ability of an enterprise to continue as a going concern, the head of the enterprise has to forecast all information for at least the next 12 months from the balance sheet date.
Principle 4: Materiality And Aggregation
In the financial statements, significant items must be presented separately. The remaining items will lie together in one group.
When presenting financial reports, whether material information is correct or not will affect the decisions of users or investors.
How to decide material items: depending on the specific situation, the nature and size of the items will be the determining factor in materiality.
Principle 5: Offset
Enterprises need to separately present all items of assets and liabilities in the financial statements, not arbitrarily clearing (unless other accounting standards require or allow clearing).
Expenses and revenues are only offset when specified in other accounting standards. Plus, profits and losses and related expenses arising from unimportant transactions and events are also offset.
Statement makers must report Material classes of assets and liabilities, income, and expenses individually. The opacity will make the financial statement readers not understand the entire transaction, and it is difficult to predict the business’s future cash flow.
Principle 6: Comparability
The information exhibited in the financial statements must be thorough, corresponding to the previous periods for easy comparison between periods.
If there is any change in the presentation or classification of items in the financial statements, the enterprises must classify comparative figures to ensure comparability with the current period.
Principle 7: Classify Assets And Liabilities
Assets and liabilities on the balance sheet side must be on display as short-term and long-term. In each section, the indicators must be sorted by decreasing liquidity.
Short-term: Asset or liability with remaining maturities
Long-term: The remaining types of assets and liabilities.
Note: When preparing financial statements, accountants must reclassify assets and liabilities of the previous period
Appropriate Period To Make Financial Statements
All firms must prepare financial report within a year – image source: conversecountywy
There are certain periods of the year in which businesses will prepare their financial statements.
- Enterprises must make annual financial statements according to the year specified in the Law on Accounting.
- The interim financial statements are prepared in each quarter of the year, together with the semi-annual report calculated according to the financial year of the Law on Accounting.
- Financial statements prepared on a weekly, monthly, 6-month, or 9-month basis will be proceeded as required by law, following regulations of the parent company or the company’s owner.
- Businesses that carry out mergers, acquisitions, and splits need financial statements when performing the above activities.
Deadline For Submission Of Financial Statements
There will be a particular time limit based on each type of enterprise.
State-Owned Enterprises
As for quarterly reports, the submission period must be within 20 days from the end of the quarterly accounting period. If it is a parent company established or a state corporation, the time limit is 45 days at the latest.
Submission deadline differs in terms of each type of enterprise – image source: pixabay
In case the subsidiary of the parent company generates the report, the accounting unit shall submit it to the parent company within the time limit specified by the parent company.
On the other hand, the limited period of annual reports must be within 30 days from the end of the annual accounting period. If the parent prepares the statements, the time will be 90 days.
The affiliated enterprise accounting units must submit the report to the parent company within the time limit prescribed by the managing company.
Other Types Of Enterprises
Private accounting units and partnerships need to prepare and submit financial statements within 30 days if it is an annual report.
For other accounting units, the time limit for the submission is 90 days.
FAQs
What Are Notes Needed Before Reading And Understanding Financial Statements?
Financial statements are usually transparently disclosed on the company’s website. You can download it for easy monitoring when needed. These reports are often used for annual tax audits and payments. For those who want to read and analyze financial statements themselves, it is important to note the following issues:
- It is advisable to compare data at different times to assess the development trend of the business.
- Compare with other businesses in the same field to re-evaluate the strengths and weaknesses of the organization.
- The balance sheet numbers are for the time being, and the income statement is for the period only. For an overview, you should refer to more data from the financial statements of the last five years.
What Are The Differences Between Financial Statements And Management Statements?
Financial statements are common in business companies. But when it comes to management statements, some enterprises may be unfamiliar with these reports. Administrative reports help to boost their business to a new bright perspective.
Management report are not compulsory due to only for internal use – image source: pxhere
Unlike financial statements, management reports are optional and only for internal use. Your company is not subject to GAAP guidelines when generating these reports.
Instead of an overall company assessment, the management report mainly focuses on parts of the business. By categorizing, you can go into detail and analyze the factors that drive your business.
What Are The Differences Between Consolidated Financial Statements And Separate Ones?
Two main points make consolidated financials differ from the separate ones:
The difference in equity figure
When preparing separate financial statements, investments in subsidiaries are recognized using the principal method. Thus, the owner (shareholder of the parent company) neither adds nor withdraws capital.
Meanwhile, the consolidated financial statements are prepared according to the share of capital currently owned by shareholders of the parent company in the subsidiary at the date of the agreement. (Equity method).
On the balance sheet
The item “Goodwill” is not found in separate financial statements,
while on the Consolidated Balance sheet, the item “Goodwill” appears.
What Do You Need To Make A Financial Statement?
Preparing financial statements is a difficult job that requires time and effort. However, it does not always work, and many businesses spend years finding the problem.
To close accounting books and prepare financial statements effectively, accountants should perform the following steps:
Step 1: Arrange accounting documents
Arrange and manage the system of accounting documents in chronological order. Documents should be stored monthly and quarterly for convenience in control.
Step 2: Make detailed accounting of arising economic transactions
Based on documents that have been sorted and classified, accountants will open books and record economic transactions such as entry slips, vouchers output, receipt, payment, credit, and debit.
Step 3: Allocate arising transactions by month
Monthly, based on previous entries, accountants make amortization entries, such as:
Allocating prepaid expenses
Calculating depreciation of fixed assets
Allocating tools and equipment
Step 4: General review by asset group
For the review to occur correctly, the most frequently used method is asset grouping. This measure makes it easier for accounts to be scrutinized and for errors to be detected.
Step 5: Make general and transfer
After reviewing the detailed transactions and completing step 4, the accountants make the sales, expenses, income transfer entries, profit and loss.
Step 6: Prepare financial statements.
Create financial statements according to the current accounting regime.
Finalize the corporate income tax and personal income.
In brief
Until this very ending point, we are sure that you have thoroughly acquired all the elements concerning financial statements.
More importantly, we hope you can effectively put this knowledge into practice to foster your business.