Every organization publishes the annual report of the preceding 12 month period at the end of fiscal year. This official report will be then sent to the respective shareholders and other prospective investors who may be interested in the annual performance details. The annual report defines numerous parameters and one of the important components that investors and creditors prefer to look foremost is the financial highlights/the financial statements.
Financial statements are quite important, we will understand more with a bit of explanation. But first, you should know the purpose of an annual report.
It gives shareholders, stakeholders, and even the public a report on profits, production rate, marketing strategies, market share gains, financial achievements, and the plans for the approaching year.
Achievements are highlighted to show the good financial health of the company.
Investors or creditors will have a better picture on the ratio of total revenue made to the total amount spent.
The graphs, charts, or the tabulated data breaks down complex information into a digestible communicative form.
Coming to the financial statement, it is a broad concept that supplements sufficient information in making economic decisions.
The Financial Statement of an enterprise includes
If you are going through a financial report, see if the statements are external or internal.
External financial statements are prepared on annual basis for investors, tax authorities, or creditors. If it’s a US based organization the financial statements would be prepared as per GAAP if not as per their respective standard accounting principles.
Internal financial statements remain within the organization and not meant for public or other investors. The statements are more specific, prepared as per weekly, monthly, and quarterly basis.
A financial statement includes,
Balance Sheet :
Also, know as a statement of the financial statement, a balance sheet speaks about the company’s financial competence. What the company owns, assets, liabilities, equity items.
Income Statement :
It gives information about the profit and loss, the revenue and expenses of a predefined time.
Cash Flow Statement :
The cash flow statement is prepared for a fixed period of time. Investors and creditors will be enlightened about how the money is being utilized or the source of cash flow.
Statement of Change in Owner’s Equity or Financial Equity/Equity Statement:
It gives a report on the variations in the capital account for a particular time period due to withdrawals, contributions, net income or net loss.
Significance of Financial Statements
It Builds Trust
If a company is to win the trust of investors, then it has to prepare accurate financial statements. Investors look for transparency and of course profits vowing to their investments made and companies should work towards giving the same.
Recently revenue recognition standards were upgraded to protect the investors from fake profits or fake revenue report.
Companies need to prepare their financial statements in accordance with the current standard accounting principles, creating a transparent atmosphere, which would foster a good relationship with the investors.
Allows making Better Financial Decisions and Planning
Financial statements do influence business decisions. You have your financial report in your hand and know that numbers are saying that you have failed. But if you look closely, these numbers will explain about your possibly taken misstep or a bad decision that was made.
Everything is hidden in the numbers; all you have to do is look closely.
With a detailed-rich financial report, you can,
Manage the cash flow.
Analyze the debt service.
Determine the pricing strategies.
When you are able to successfully handle sales, money, pricing, irrespective of profit or loss, it shows your decision-making skills.
Also, financial statements help you make appropriate financial planning for the future.
Facilitates Statutory Audits
When the statutory auditors justify or account for the accuracy of your financial reports, it enhances the trust factor with your investors.
Financial statements are prepared to cite how a company used the investments, where the amount was invested into, and what was the annual performance.
Statutory auditing helps in justifying the account made. If there is a fair presentation of the numbers with consistency, it would promote smooth statutory auditing, helping you build a better relationship with the stakeholders or shareholders.
Helps to Analyze the Performance of Organizations
A financial statement is like a report card for an organization. Have they passed with flying profit or failed with bad investments? Everything, a financial statement tells.
Whether it is a profit or loss, it is easier to analyze the performance of an organization in terms of investments and revenue from a financial statement.