Financial Reporting/ Statement and its component

November 1, 2020

Financial reporting simply means the information that discloses the financial health of your business. In particular, it is the perfect way for the management and external stakeholders to know how the company has been performing over a period of time.

Information provided by financial reporting can be vital for management to make decisions about the future of the business. In addition, financial reports form the backbone for planning, analysis, benchmarking, and decision making to achieve the financial goal.

Financial reports are generally issued on a quarterly and annual basis. Some of its essential components include:

Income statement

The income Statement is the information on the company's income, expenses, and profits or loss over a period of time. It can also be defined as the profit and loss statement or the statement of income and expense.

Component of financial reporting
Income Statement helps to get an overview of company's financial status. Source: Pixel

The income statement offers useful insights into the activities of a business, the efficiency of its management, the under-performing sectors, and its performance relative to industry peers. Technically, the statement includes the details of the company's gross profit (or loss) or net profit (or loss).

Balance sheet

It is a report on the assets, liabilities, and equity of a company at a given point in time, usually at the end of a fiscal quarter or year. Additionally, Balance sheets should include detailed recordings of the non-current assets, current assets, non-current liabilities, and current liabilities.

financial reporting
Balance sheet is a report on the assets, liabilities, and equity of a company. Source: Pixel

In particular, non-current assets include computers/laptops, machines, and office furniture while current assets include inventory, accounts receivable, and cash. On the other hand, non-current liabilities deal with debt financing whereas current liabilities include information about trade payables and bank overdrafts.

Cash flows

Cash flows are the next component of financial reporting. It summarizes the inward and outward cash movements of your business. Information regarding Inflows and outflows of money can be visualized from operations, investment, and financing activities.

financial reporting
Cash Flows summarizes the inward and outward cash movements. Source: Pixel

Company cash flows rely on the company's everyday business. In particular, sales and inventory acquisitions are classified as the activity of the company. Moreover, cash flow also includes investments that contributed to revenue and investment produced by long-term project programs.

Changes in equity

Change in equity is the last component of financial reporting. This aspect reflects on changes in the company's equity during the specified time frame. Any adjustment over a given time can be tracked from an increase or decrease of the starting balance as compared to the final balance.

The fluctuation of the organization's equity arises from transactions such as new capital investment, the dividend paid, owner’s withdrawal, net profit or loss, and fixed assets revaluation, etc.

Change in Equity correlates balance sheet and the company's income statement. Source: Picpedia

Change is equity also indicates a correlation between the balance sheet and the company's income statement. Furthermore, it also demonstrates transactions that are not on the balance sheet and on the income statement, such as the dividend payment and the withdrawal of the owner.

Conclusion

Creating a financial report or statement has a significant role for your business, ranging from legal issues to the accomplishment of the company's financial targets. To be specific, financial statements lets executives communicate previous achievements and future business goals.

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