Within the business and accounting sphere, financial statements represent a fundamental tool for any business. They are a type of document required by law that provides information on the financial and economic status of a company. The main characteristics, types and functions of each of them are described below.
What are financial statements and what is their function?
Financial statements are a crucial tool for the analysis and control of a company’s accounting. The information they provide and their use will allow us to make informed strategic decisions for our business.
In this sense, if you own or work in a company, a thorough understanding of how financial statements work will allow you to get the most out of them and achieve optimal business performance.
Financial statements are documents that summarise all of a company’s operations over a given period of time. In them, we can find information such as the total invoiced, purchases made and outstanding debts, among others.
Most importantly, they provide a global and summarised view of the company’s financial situation to assist in decision-making and strategic direction.
What are financial statements for?
They are very useful for finding out various data: the solvency of suppliers, assessing the risk of external financing operations and complying with tax obligations for a given accounting period.
Above all, financial statements are a vital tool for the owners and management teams of a company, enabling them to make informed strategic decisions for their business.
What information is contained in financial statements?
Financial statements contain information grouped by accounting items for a specific period of time. The accounting items are the detailed records of the financial transactions that a company carries out.
Each accounting item consists of several elements, such as the date, the description of the transaction, the account involved, the amount, and whether it is a cash inflow or outflow. Such information allows for the analysis of the economic results and the performance of the company.
How are financial statements used?
Financial statements are key documents for assessing the financial health of a company, as they record all of its operations. In order to create the various financial statements, a number of steps must be followed and the available accounting information must be used.
In general, all financial transactions of the company must be recorded and classified into the appropriate accounts, such as income, expenses, assets and liabilities. From this information, basic financial statements such as the balance sheet, income statement and cash flow statement can be generated.
What are the basic financial statements of a company?
Financial statements are essential for running a business, whether you are looking for investors or applying for credit. That is why it is important to know the four basic financial statements that will help you achieve your financial goals.
Statement of Financial Position
The balance sheet is an accounting document that shows the financial position of a company at a given point in time. This document is presented in tabular form and is divided into three parts:
- Assets: assets and rights owned by the company, both long and short-term.
- Liabilities: represent all debts and obligations.
- Equity: the company’s own funds, the capital contributed by the shareholders and the equity of the company.
Income statement
The income statement, also known as the profit and loss statement or operating statement, shows all the operations derived from the economic activities of a company. This document shows the income and expenses that the company has obtained.
The difference between the two items will result in the company’s economic profit or loss. It shows whether the company is achieving its objectives, and whether it is profitable, and allows us to detect possible problems or areas for improvement.
Statement of changes in equity
The cash flow statement reports the variations and movements of cash during a given period of time. This document helps us to assess the company’s ability to generate liquidity and possible financing needs, although its presentation is not mandatory for those companies that can formulate abridged balance sheets and notes to the financial statements.
The cash flow statement is divided into three types of activities:
- Operating activities (receipts and payments related to the company’s main activity).
- Financing activities (receipts and payments from the sale of securities, repayment of loans, etc.).
- Investing activities (receipts and payments to acquire non-current assets).
The statement of changes in equity shows all the movements and financial transactions carried out by the company and their impact on equity, although its presentation is not compulsory for those companies that can prepare abridged balance sheets and annual reports:
- The statement of recognised income and expense reflects the changes in equity arising from the profit or loss on the income statement.
- Income and expenses attributable to equity in accordance with current regulations.
Within the business sphere, financial statements are a type of accounting document that serves to know the real state of the company’s accounts and the different asset movements it incurs, which is why they are essential for the management of your business.
If you have any questions on this subject, please contact our tax advisors in Barcelona.
