Financial Statement/Reporting

Definition: A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity

Importance: At regular period public companies must prepare documents called financial statements. Financial statements show the financial performance of an company. They are used for both internal-, and external purposes. When they are used internally, the management and sometimes the employees use it for their own information. Managers use it to plan ahead and set goals for upcoming periods. When they use the financial statements that were published, the management can compare them with their internally used financial statements. They can also use their own and other enterprises’ financial statements for comparison with macro economical data’s and forecasts, as well as to the market and industry in which they operate in.

How can financial reporting play an important role to exhibit financial position of a business?

Financial reporting refers to the periodic production of business financial statements. These financial statements include the balance sheet, income statement, and cash flow statement.

The balance sheet shows a moment in time snapshot of a company’s financial health.

Can this company take on additional debt or is it already overleveraged? Can it meet its current obligations with cash and other current assets that can be converted into cash?

The income statement measures company performance in terms of sales and profitability.

Has this company maintained or improved its sales and profit margins compared to prior years? If not, what has caused them to decline?

The cash flow statement shows how a company generates cash flow and how it spends its cash.

Is cash flow after core operations sufficient to meet all debt obligations and still leave excess cash to reinvest in capital assets like vehicles, machinery & equipment?

Without accurate financial reporting, any answers to these questions would be guesses at best. Management would have no idea of how profitable, how leveraged, how liquid, nor how efficient their business is. They could not determine if their business could

whether bear another economic recession like the one we are still experiencing, whether they are growing their business and doing so profitably, or if they have the capacity to meet all current obligations for payroll, utilities, and loan obligations, without running out of cash.

Accurate financial reporting is also one way a small business owner can have a control mechanism by which any irregularities (expense abuses, pricing issues, etc.) in the financial performance of the company can be brought to the forefront. Essentially, a business without financial reporting is the equivalent of a rowboat heading upstream without any paddles, not likely to move forward, and most likely to go backward.

Balance Sheet

Definition: A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period

OR

A financial statement that summarizes a company's assets, liabilities and shareholder’s equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity

Importance: The Balance Sheet for accounting is an extremely important and often used statement of entity condition. It shows the extent of entity ownership

of assets, liability and equity at a given point in time. This point is the date on the statement. It is a physical representation of the 'accounting equation.' The

equation states that at any point in time, the assets of the business are equal to the sum of the liabilities and owner's equity. The equation also forms the basis

of the statement structure, which mirrors the three aspects of the equation. The three parts are: 1) assets, 2) liabilities and 3) owner's equity. Let's look at each

one.

Assets are anything that the business owns. We tend to consider assets to be land, buildings, vehicles, inventory and cash but they are also other things. The

adding machines, computers, copyrights, patents, goodwill, time clocks, pens, wrenches, ladders, paper and copy machines are also included. This expands the

definition to encompass all that the business has acquired by purchase or by owner contributions.

Liabilities - when doing accounting - on the other hand, are claims against the assets excluding the owner's equity contributions. These claims can take several

forms. Some are both short- and long-term loans, bills for utilities, rent, employee expenses, bonds, taxes and many other items. They reduce the total value of

the assets. Interestingly, liabilities are very liquid. They change on a constant basis. For instance, widgets are purchased to sell, the business uses utilities to

operate and cash or credit is needed to pay these outside demands.

Finally, there is the Owner's Equity section of the Balance Sheet. This summarizes, in varying degrees of detail, who owns the business. For instance, if stock is

issued, it will show what the stock is valued at and usually how many shares are outstanding. It is not unusual to see differing issues of stock and wide

differences in the values. In simple businesses, the equity might just be divided between several partners. Though, the Balance Sheet probably won't reveal the

names of the partners and how much of the business each one owns. The ownership is usually specified in other documents related to the corporate records.

But, this section will show an aggregate of the amounts.

The other important parts of the Owner's Equity, in accounting, are related to the Income Statement. The Net Income, or Net Loss, is part of the equity portion.

Typically there are two parts to it representing the previous retained earnings of the entity and another part, which represents present earnings. Together, they

show how much the value of the business has increased, or decreased because of entity operations. If the business is operating at a loss, the Owner's Equity is

becoming less valuable and will show that the owners now have less equity that they had previously. If loss condition continues, the business eventually ceases.

The Balance Sheet is an extremely important statement in the accounting and will be found, sometimes several ways, in the company prospectus. It is also

provided to various government regulatory agencies. They use them to assure the business is complying with laws, regulations and taxing requirements.

Typically, there is an outside audit of this statement along with the Income and Cash Flow statements too. This provides an outside review and an opinion of

how well the business is keeping their books. So, the Balance Sheet is an extremely important financial document.

Income statement/ Statement of Profit & Loss

Financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Also known as the "profit and loss statement" or "Statement of revenue and expense".

Explanation of Income Statement/ Statement of Profit and Loss: The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections.

The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment.

The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section.

Importance: The Income Statement shows the revenues and expenses for a business. It is usually prepared monthly but can cover any time period up to twelve months. In evaluating the success of a business the income statement shows if the revenues are greater than the expenses (in the black or profit) or if the expenses are greater than the revenue (in the red or loss).

The Income Statement can be prepared on a cash basis, accrual basis or an income tax basis. It is important to understand the basis for preparation. It is not unusual for an income statement to show a profit using one method and a loss using another method.

When evaluating the success of a business even though you can learn a great deal from the income statement it is essential to also review the balance sheet and statement of cash flows to get a complete picture of the business.

One of the Example is given below:

Statement of Owner’s Equity / Statement of retained earning

The Statement of Owner's Equity shows the change in owner's equity during a given time period. It lists the owner equity balance at the beginning of the period, additions and subtractions to the balance, and the ending balance. Additions come from owner investments and income; subtractions from owner withdrawals

and losses.

OR

Financial Statement showing the beginning balance, additions to and deductions from, and the ending balance of the shareholder’s equity account, for a specified period. Also called statement of shareholder’s equity.

OR

The Statement of Owner’s Equity reflects the changes in the owner’s equity of the company for a specified period of time, and is also typically done by the business on a monthly basis. It is calculated using the following formula: Owner’s equity beginning of month + investments + net income - withdrawals = owner’s equity end of month.

The importance of the Statement of Owner’s Equity is to show the change in equity. It can explain where money came from and where money went in the business.

The example of “statement of owner’s equity/ Statement of retained earning” is given on next page:

Depreciation

A reduction in the value of an asset with the passage of time, due in particular to wear and tear

OR

To record the physical decrease in the value of fixed asset is called depreciation.

OR

Depreciation is a non-cash expense that reduces the value of an asset over time.

Assets depreciate for two reasons:

Wear and tear. For example, an auto will decrease in value because of the mileage, wear on tires, and other factors related to the use of the vehicle. Obsolescence. Assets also decrease in value as they are replaced by newer models. Last year's car model is less valuable because there is a newer model in

the marketplace.

Methods to calculate depreciation:

Straight line depreciation method: A method of computing depreciation by dividing the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used.

The original cost of the asset, including costs of acquiring the asset, transporting it, and setting it up Less the salvage value (the "scrap" value) Divided over the years of useful life of the asset.

For example, the annual depreciation on a machine with a useful life of 20 years,

a salvage value of Rs.1000

and a cost of Rs.50,000 is Rs.2450 how? It’s calculated below:

Rs.50,000-1000= Rs.49,000

Then Rs.49,000/20= Rs.2450.

References/Source:

1. http://answers.yahoo.com/question/index?qid=20080526192714AANZUfi

2. http://www.horizoncommunitybank.com/download/HCB-NEWSLETTER-0512.pdf

3. http://csanad.hubpages.com/hub/The-Importance-of-financial-statements

4. http://ezinearticles.com/?The-Importance-of-the-Balance-Sheet-as-a-Financial&id=513212

5. http://www.investopedia.com/terms/i/incomestatement.asp#axzz26R1IxX2q

6. http://answers.yahoo.com/question/index?qid=20110122114712AAOmJBB

7. http://www.businessdictionary.com/definition/statement-of-owners-equity.html

8. http://accountingaide.com/examples/stmtownereq.htm

9. http://suite101.com/article/understanding-financial-statements---a-brief-ove-a210432

10. http://www.investopedia.com/terms/d/depreciation.asp#axzz26R1IxX2q

11. http://biztaxlaw.about.com/od/glossaryd/g/depreciation.htm