Introduction to types of financial statements
Financial statements are reports that present the financial performance of a company.
Financial statements consist of 5 components: statement of financial position, statement of profit or loss, statement of cash flows, statement of change in equity and notes to financial statements.
Statement of financial position (or Balance Sheet)
Balance sheet presents company's assets, liabilities and equity at a certain date (reporting date).
On the other hand, it shows accumulated financial performance since company is incorporated until present.
Statement of profit or loss (or income statement)
Statement of profit or loss shows company's revenue and expenses for a period of time, which is typically 1 year. The statement provides company a sense of how much it earns or losses from one year operation.
Statement of profit or loss comprises the following information:
- Sales
- Costs
- Selling and administrative expenses
- Finance costs
- Corporate income tax
Statement of cash flows
Statement of cash flows present company's activities based on cash basis while statement of financial position and statement of profit or loss are prepared on accrual basis. Statement of cash flows include only transactions which cash is in or out.
Company's activities are presented into 3 main groups as below:
- Operating activities - shows cash inflows and outflows from operational activities i.e. cash received from customers or cash paid to suppliers
- Investing activities - shows cash inflows and outflows for investing transactions such as purchase production machines etc.
- Financing activities - shows cash inflows and outflows from funding activities. For example, borrow money from bank, pay dividend to shareholders etc.
Statement of change in equity
Statement of change in equity shows movement of equity over a particular reporting period. Equity movement comprises share issuing or repurchase, dividend payments and the result of accumulated profit or loss, which is called retained earnings.
Notes to financial statements
Notes to financial statements give supplementary information pertaining to those financial information presented in the above statements. The notes are an integral part of financial statements and are required by the full disclosure principle.
