Financial reports, also referred to as financial accounting, is a detailed process of analysing and documenting transactions to report the financial performance, status, and stability of a company or business. It involves the preparation of several financial reports or statements that can be used to make investment decisions, analyze financial risk, and foster profitability.
The three most common and basic financial reports include the balance sheet statement, the income statement, and the cash flow statement. Besides there are other financial statements as well such as the shareholder’s equity statement and the notes on financial statements. We shall understand these statements in detail along with the ways to read them for better utilization.
Financial Reports: Key Takeaways
- Financial reports are a depiction of a company’s finances, its financial status and profitability, etc. They facilitate financial understanding for favourable financial management and profits.
- The most important financial reports include balance sheet statements, income statements, and cash flow statements. Companies also prepare shareholder’s equity statements.
- The balance sheet provides the data of total assets, total liabilities, and shareholder’s equity of a financial entity.
- Income statements depict the revenue and expenses of a company whereas cash flow statements (CFS) showcase the operational financing of a company via inflows and outflows.
Understanding Financial Reports: Meaning and Purpose
Financial reports are financial documentation of a company’s finances including its income, expenses, cash flow, assets, liabilities, and equity. It is the depiction of the financial health, performance, status, and stability of a financial entity like a company or business.
These are official financial records documented precisely and in detail to gather all the data on the total asset value of a company and the liabilities it has. This facilitates finding the net worth of a company or business.
A financial statement presents financial information in a formal and structured manner which includes the financial reports along with a management analysis and discussion. Governments and accountants audit the financial reports of companies to ensure the accuracy of financial reporting for financing, taxation, and investment purposes.
A for-profit business primarily has three financial reports or statements. These are the balance sheet statements, income statements and cash flow statements. Non-profit businesses have the same financial reports with modified or similar names.
Types of Financial Reports or Statements with Examples
Financial reports or financial statements are of many types. However, there are four most common financial report types that most businesses or companies use. These are discussed as follows:
Balance Sheet
Balance sheets are a quintessential financial report as they provide a quick overview of a company or business’s finances including its assets, liabilities, and equity. They are also referred to as the statement on financial position as they show the finances of a company depicting its financial status at a specific point in time.
A balance sheet helps an investor understand the profitability of a business by looking at its debt history, liquidity and overall financial health. One can find the net worth of a company by simply subtracting the total liabilities from total assets.
Cash flow Statement (CFS)
Cash flow statements are a representation of a company’s expenditures by showcasing the way a company earns or spends capital. It incorporates accounts payable, accounts receivable, income tax, wages, investment money etc.
They are instrumental in understanding the operations and functioning of a company. Thus, investors use this statement to know about the financial stability of a company or business. Cash flow statements are complementary to balance sheet reports and income statements.
Income Statement
An income statement is a depiction of the performance of a financial entity. It showcases the net income or revenue, expenses, and profit or loss of a business over a period. Thus, it is also referred to as the Profit & Loss (P&L) statement.
These statements facilitate understanding the financial trends of a company and its profitability. They are generally incorporated in quarterly or yearly financial reports.
Statement of Shareholder’s Equity
Statement of shareholder’s equity provides the details of movements in the accounts of equity in the financial reporting period. It showcases the changes in the ownership interests of a company.
Further, there is also a key financial report called the Note to Financial Statements that is used by financial entities in financial reporting.
How do you read Financial Reports?
There are several ways to read and analyze financial reports or statements to make the best use of them and bring the company profit. The major ones are as follows:
Analysing the present financial condition of the business
The foremost way to read a financial report is to go through the key statements prepared such as the balance sheet, income statements, cash flow report, etc. Analysing these financial reports helps understand the financial condition of the business or company.
It is instrumental in framing further financial decisions for the company or business depending upon its financial stability or instability, financial goals, profitability, and market trends.
Here is a step-by-step guide on how to analyse financial reports:
Step 1: Gather the varied financial reports of statements including the balance sheet, income statement, and cash flow reports.
Step 2: Review the balance sheet to assess the company’s assets, liabilities, and shareholder equity. Shareholder equity can also be separately analysed via the statements on shareholder’s equity.
Step 3: Examine the income reports to find out the income, expenses, and net income for the period of accounting.
Step 4: Analyse the cash flow statement and look for inflows, outflows, financing cash flow, operating cash flow, and investing cash flow.
Step 5: Prepare financial ratios such as liquidity ratio, leverage ratio, and profitability ratio.
Step 6: Compare for trend analysis. Look for growth or fall trends over a period and with different competitors, market trends, etc.
Comparing the financial status with the past financial status
A further step in reading financial statements or reports would be to compare them with the previous financial reports of the company or business. This comparison can be on a quarterly or yearly basis.
The comparative analysis of a financial entity’s financial reports over the quarters or years is important to understand various things. This includes knowing about the overall growth or fall trend of the company, particular growth or fall trend of a product or business entity, the ways that have proved profitable and others that have not, etc.
Knowing about the shareholder equity value
Among the prominent financial report types are the statements of shareholder equity value. These provide the details of all the movements in the account of equity over a period. It is important to go through these statements and foster knowledge about the equity share of one’s company or business for better financial management.
Comparative analysis with competitors to boost profit
A profiting way to read financial reports is to compare them with the financial statements of other companies or businesses, especially those that are one’s competitors in the same industry.
This facilitates an understanding of the differences between the operations, functioning, and profits. A comparative analysis would help to know about what companies are performing the best and vice-versa.
All these ways of financial report reading facilitate better financial decisions and help a financial entity attain greater financial gains.
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Financial Reports FAQs
Q1. What are financial statements?
Ans: Financial statements, also known as financial reports, are official records of all the financial activities of a financial entity such as a business, company, etc. A financial statement presents a clear-cut picture of the financial aspects of a financial entity such as balance sheet, cash flow, and equity, and represents its financial condition.
Q2. What are the major types of financial reports?
Ans: There are four major types of financial reports or statements. These are the balance sheet, cash flow statement, shareholder’s equity statement, and income statement.
Q3. How do you read financial reports or statements?
Ans: Financial statements are read in numerous ways. First, they are used to comprehend the present financial condition of a business or company by looking at its cash flow statement, balance sheet, and income statement. It is then read to know the shareholder’s equity percentage and values. Further, they are analyzed comparatively alongside past financial reports.
