5 Main Financial Statements of a Business Organization

The financial statements are the financial reports that provide financial information about a business organization. However, this financial information includes assets, liabilities, equity, expenses, income other financial-related information in a period. So, users make use of these statements for different purposes when making decisions.

Types of financial statements

According to IAS 1, there are five main financial statements to prepare and present by every business entity. This is in line with both IFRS and US GAAP. More so, they are prepared and presented in two years for comparison purposes. These statements include:

Statement of profit or loss

Statement of profit or loss, also called income statement reports whether an entity makes profit or loss during a period. So, it measures the financial performance of the business. This financial statement contains three core financial information such as revenue, expenses, profit, or loss for a period.

According to IFRS, you can use a single-step or a multiple-step approach to prepare and present an income statement for your entity. However, a single-step approach prepares and presents the income statement and other comprehensive income in a statement. While a multiple-step approach presents both income statement and other comprehensive income in two statements. Net profit or loss is the bottom line of the income statement. The net profit or loss = Gross profit – expenses. Therefore, gross profit or loss = Revenue – Cost of goods sold (COGS)

Main characteristics

  • It shows the financial performance of an organization.
  • Income statement shows the revenue and expenses of an entity.
  • It is prepared for a period such as yearly, quarterly, etc.
  • Make use of accounting principles and conventions in presenting figures.

Balance Sheet

A balance sheet, also called a Statement of financial position. It shows the value of assets, liabilities, and equities at the end of a period. So, the balance sheet shows the net worth of the business. Net worth of an entity is the difference between total assets and liabilities. In the balance sheet assets must equal equity plus liabilities (i.e. Assets = Equity + Liabilities). However, the relationship between the income statement and the balance sheet is net profit or loss. The net profit or loss is added to retained earnings in the statement of financial position.

Main characteristics

  • It shows the value of assets, liabilities, and equity of an entity
  • Balance sheet is presented at the end of a period
  • It shows the financial position of an entity.
  • It complies with accounting equation liabilities (i.e. Assets = Equity + Liabilities).

Statement of cash flow

This statement contains the cash inflows and outflows of an entity. So, it shows the movement of cash during a period, usually a year. It contains three sections. These sections are cash flow from operating activities, cash flow from investing activities as well as cash flow from financing activities. There are two methods to prepare the statement of cash flow; direct and indirect method. However, IAS 7 recognizes indirect methods for the preparation and presentation of cash flow statements. It shows changes in cash for a period, the cash balance at the beginning as well as cash balance at the end.

Main characteristics

  • It contains three sections (i.e. cash flow from operating, investing, and financing activities)
  • The statement shows changes in cash (i.e. increase and decrease in cash).
  • It is presented for a period.
  • The statement follows a cash basis
  • It shows the actual cash movements.

Statement of Change in Equity

This statement shows the changes in retained earnings, the contribution from shareholders, changes in equity and equity balance at the end of a period. It contains types of share capital, total share capital, retained earnings, the dividend paid, and other reserves. The correctness of this statement depends on the correctness of both the income statement and the balance sheet.

Main characteristics

  • Shows changes in equity.
  • The statement is presented at the end of a period.
  • Statement of Change in Equity shows total share capital.
  • It shows dividends paid.

Note to Financial Statements

This contains information that relates to the financial statements that can help the users to have a better understanding of the statements. It is a mandatory requirement by IFRS. This is also known as disclosure requirements. However, it contains information about the accounting policies, nature of business, breakdown of figures, and others.

Conclusion

In conclusion, all the statements are important to the users of accounting information to make better decisions. However, an income statement helps to understand the financial performance of the business. While the balance sheet helps to understand the financial position of the entity. Statement of cash flow helps to understand liquidity position as a statement of equity shows the equity position of an entity.

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