What is a Financial Statement?

Financial statements are a primary tool for a business. It shows a clear picture of your company’s financial condition and helps you to understand your current financial situation. The financial statement also helps you make future decisions. 

Financial statements are documents that show your financial scenario for a specific period. It includes data on how much money you or your business have earned and spent.

Investors and financial analysts highly depend on financial statements to analyze financial performance and to make forecasts about the future route. 

What is a Consolidated Financial Statement?

A consolidated financial statement is a collection of the financial statements of multiple companies. It outlines the overall economic grouped picture of activities, income, assets, and liabilities. This type of financial statement is often used for a group of companies to compare the performance of its multiple divisions or subsidiaries. 

The parent business prepares the consolidated financial statement, which incorporates the records of its subsidiaries. The particular accounting guidelines for consolidation are determined by the nature of the company and the percentage of ownership it possesses in other companies. A parent company is usually required to be included in consolidated financial statements if it owns more than 50% of a subsidiary. 

Types of Financial Statements

Many important financial documents help to make financial decisions. The four main types of financial statements are balance sheet, income statement, cash flow statement, and statement of retained earnings. 

Balance Sheet: A balance sheet is a statement that shows the position of assets, liabilities, and equity. It provides a summary of a company’s assets, liabilities, and shareholder’s equity for a certain period. By deducting the liabilities from the assets we can find the owner’s equity or the net worth of a business. 

It is based on the equation: Assets = Liabilities + Shareholders Equity

• Assets: Assets are resources owned by a company. Assets can be categorized mainly into two categories. They are current assets and fixed assets. Cash, marketable securities, and cash equivalents are the best examples of current assets, and machinery, buildings, land, computer equipment, and vehicles are the best examples of fixed assets. 
• Liabilities: Liabilities are the debt a company has from other individuals or organizations. It includes interest payable, loans, taxes, etc. Liabilities can be classified into short-term and long-term periods. Short-term liabilities have to be paid within that accounting year only and long-term liabilities have a longer period of repayment, usually more than a year. 
• Equity: The difference between assets and liabilities is equity. Retained earnings and share capital are examples of equity. By deducting liabilities from the assets, equity is calculated.

Income Statement: The income statement is the most important element of the financial statements. An income statement shows the amount of money a company makes and spends over a certain period. It shows revenues, expenses, profits, losses, net income, and earnings per share.  The three most important components of a income statement are: 

• Revenue: Revenue is the money a business earns or generates during a period. Revenues can be generated in both cash and credit forms. A business can generate revenue by selling goods and services which is known as operating revenue and from business activities such as Interest earned, and rental income from a property. 
• Expenses: Expenses are the total cost of running the organization’s day-to-day operations. It includes administrative expenses such as salaries, depreciation, utility bills, etc. This helps Investors to find the amount of money an organization needs to run its business. 
• Profit or Loss: Profit or loss is the actual or net income of the organization. Profit is calculated by deducting expenses from the revenues. The organization will make a profit if the amount of revenue is higher than the expenses. And it will face a loss if it has higher expenses than the revenue it generates. 

So, the income statement is the most important document of the financial statement which shows the actual earnings of the organization. 

Cash flow statement: A cash flow statement shows cash movements in an organization during a period. It shows the cash inflows and outflows in an organization. It accompanies the balance sheet and income statement. A cash flow statement draws a picture of how a company’s operations are running, from where it is making money and how it is spending the money. It helps investors to understand the organization better. 

The cash flow statement has three major components. Those are: 

• Operating Activities: The operating activities include the sources of cash and the uses of cash to run the business. 
• Investing Activities: Investing activities include any movement of cash from investments. Purchasing assets, and making loan payments may be included in this category.
• Financing Activities: Financing activities include cash from investors, banks, or the cash paid to shareholders. Debt issuance, equity issuance, stock repurchases, dividends, and debt repayments are the financial activities.

Statement of Retained Earnings: Statement of Retained Earnings shows the changes in equity. This includes the sale or repurchase of shares, and dividend payments during a given period. This statement is also called a statement of owner’s equity.

Why are Financial Statements Important?

Financial statements represent the real picture of the company’s financial situation in a given period. Canadian companies must record all business transactions maintaining the International Financial Reporting Standards. This organization designed a set of guidelines. All companies must follow the guidelines when making the reports. These guidelines help to track and record accurately money inflow and outflow in the businesses.  

The purpose of a financial statement is to ensure that the business is ethical and lawful. If you do not have a record of your financial cash inflow and outflow, external auditors can raise questions about your business activities. 

Investors have the right to know about the finances of a business. If you are looking for an investment and your financial statements are not updated, it can be suspicious. 

Financial statements can help to make decisions. At a glance, business owners can have the overall scenario of the assets and liabilities. It can help to monitor and improve the finances for the future. 

Lastly, in times of filing a tax return, a financial statement can help you to better understand and prepare for your tax report.

How to Prepare Income Statements

A financial statement is a critical financial document. Preparing these documents correctly can help you to gather valuable business information. Financial statements are usually prepared annually. Accountants usually prepare the financial statement at the year’s end. Smaller businesses or those organizations that do not have an accountant, often prepare with the help of an internal bookkeeper. You can also prepare the financial statement using templates available on the internet. 

A financial statement is vital for any business. It helps to draw the overall financial scenario of the business and to keep the clarity of every transaction. To gain your business goal and to survive your business in the long run having a financial statement is a must.  

A high-level summary of the business’s financial performance is provided by financial statements. For management teams, shareholders, investors, lenders, and financial journalists, this information is crucial. These declarations are also used by auditors to confirm that the company complies with laws and rules.