At the end of a specific accounting period, an income statement is prepared to determine whether a business has made a profit or a loss, and a financial statement is prepared with assets, liabilities, and capital to understand the financial status. However, the users of financial information can’t find all the details they need from the information described in these financial statements. Therefore, the financial information of the organization has to be presented to the users rationally after analyzing the financial data based on different perspectives and issues. Various methods of making the financial information useful through interpretive analysis of financial statements include ratio analysis, break-even analysis, and cash flow analysis. Through financial analysis, it is possible to gain an accurate understanding of the success or failure of the organization’s financial operations and determine a future course of action. Therefore, the review of financial statements through financial analysis plays a very important role in financing.
Introduction
Every company discloses the picture of their financial transactions by preparing financial statements. These financial statements are prepared for the use of creditors, owners and management authorities. These financial statements are prepared following a guideline known as Generally Accepted Accounting Principles (GAAP).
Elements of Financial Statement:
- Balance Sheet/Statement of Financial Position
- Income Statement
- Statement of Owner’s Equity
- Statement of Cash Flow
It is also noted that as per IAS – 1 there are 5 elements in financial statements. Apart from the above 4, there is another element:- - Notes to the financial statements.
These notes on financial statements contain detail interpretation of various items of financial statements, and application of the accounting principles.
The 4 Key of the Financial Statement
1. Balance Sheet/Statement of Financial Position
2. Income Statement
3. Statement of Changes in Equity
Statement of Cash Flows
Statement of Financial Position
A statement of all the assets, liabilities and capital of the business as at the last day of the accounting period is prepared to know the financial condition of the business is called balance sheet. Balance sheet also known as statement of financial position. Balance sheet is a summary of a firm’s financial position at a particular point in time. Balance sheet is also called asset and liability statements. The sum of assets equals the sum of the liabilities and the owner’s equity.
Income Statement
The statement that shows the profit or loss as a result of the operation of an organization at the end of a specific accounting period is called income statement. Income statement is very important among financial statements. In short, the balance that remains after subtracting the total expenses from the total income of the particular accounting period is called the net profit of the respective accounting period. A negative net income is called a net loss. The income statement provides a summary financial picture of the firm’s operating activities over a period of time. Accounting period usually means 1 year i.e. the year ending from 1st January to 31st December. Also, income statement has to be prepared on monthly basis for management use.
Statement of Owner’s Equities
This statement shows how many shareholders there were, how many there are now. In other word, this statement contains what is the status of ownership in the organization and how much has changed.
Cash Flow Statement
A cash flow statement is a statement of cash inflows and outflows. The report shows that, the cash inflows and cash outflows resulting from operating activities, investing activities and financing activities of a company.
At a glance we can tell, these statements show the firm’s cash flows from operating, investing and financing activities and reconcile changes in cash and marketable securities over a period.
More Resources
Thank you for reading our resources on the Financial Analysis – Basics. Enhancing your knowledge more and progressing in your career, you may find the following guides helpful: