Financial statements are vital documents within a given company. These documents carry the company’s performance, financial position, transactions and liquidity. The financial statements are essential to the investors, management, and shareholders to depict the company’s financial health. Governments and regulatory authorities place the preparation of these statements as a requirement for audit operations and the prevention of illegal activities.
There is a set of five financial statements that a company prepares in an agreed period. These statements include the following:
- A Balance Sheet (Statement of Financial Position)
- Income Statement (Statement of Financial Performance)
- Statement of Change in Equity
- Statement of Cash Flow
- Noted to Financial Statements
Financial statements consist of five different elements that highlight the company’s financial information. The five elements include:
Assets represent the items and properties owned by a given company or business. The companies use these assets as the key factors of production and income generation. Assets are classified into two major categories:
- Current Assets – These assets are also referred to as short term assets or liquid assets. They are representative of the company’s property that can be converted to cash in less than 12 months. They include accounts receivables, inventory, cash at hand, and cash at bank, among other liquid assets.
- Non-Current Assets – These are assets whose value cannot be converted to cash in an accounting year. They are also known as long term or fixed assets and include land, buildings, and machinery.
Liabilities represent the obligations the company or business has towards the entities supporting the business operations. Liabilities are categorized into two. These include:
- Current Liabilities – These are liabilities that are short term and payable by the company within the financial year. Examples of current liabilities include salaries, bank overdrafts and trade creditors.
- Non-Current Liabilities – These are liabilities the company can pay in more than 12 months. They include long term loans, debentures and bonds.
This financial statement element represents the balance that remains after deducting business liabilities from its assets. It includes share capital, retained earnings, dividends and revaluation gains.
Revenues are representative of the increase in the cash inflow, addition of assets and lessened liabilities. These actions also lead to a rise in the company’s equity. Examples of revenues include income from interests, bank deposits, and sales revenues, as it is at times referenced.
All businesses and companies are bound to have expenses to facilitate the production and cost of operations. The payments also cover any asset depreciation and liabilities. Expenses include salaries, taxes, utility expenses, repair and maintenance, among other cash outflows.