One way to know that your business is in a stable financial condition is to develop a financial statement. This is a statement analysis that reviews and analyzes the progress of financials in your business, and by there you will know when or what changes you need to take to make the financial health of the business consistent.
Financial statements are the key components to track down funds in and out of the business. They provide reliable financial information needed in every business agreement. Keeping the financial condition of a business considerably clean and rising should be one of the vision statements of a company. Use these free financial statement examples to help guide you in creating one for your own company today.
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The General Objectives of a Financial Statement
The primary objective of financial statements is to provide detailed financial information of the company. Generally speaking, a financial statement provides this information:
- The financial position of an organization, including the status and strength assessment of assets, liabilities, and owner’s equity
- The financial performance of how the firm’s policies and operations can use its assets in their business
- The incomings and outgoings of cash, also called a cash flow statement (this is useful in business statements and marketing plans when making economic decisions and representing the organization’s operating activities)
The Importance of Financial Statements
The company’s Income statement provides important information about its financial conditions. These are major concerns for investors and creditors. Financial statements are important for many reasons, some of the most significant being as follows:
- They are useful in making economic decisions regarding financing and marketing.
- Banks use them to measure your company’s financial strength.
- They help you make minor decisions to determine the company’s overall direction.
- They tell you the company’s valuation and how well it is performing.
- They are also used in personal statements when applying for loan or mortgage.
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The Different Types of Financial Statement
There are four different types of financial statements that are used by investors or creditors to determine the financial status of a company and if the business is worth the value.
This statement is also known as profit and loss statement. It covers the financial performance of a company for the entire report period. An income statement shows a list of all revenues and then determines the net profit or loss of any business over a specified period of time. It is composed of two elements:
- Income earned over a period
- Expense incurred by the business
This statement reports the financial position of a business statement at a given report date. This comprises three elements:
- Assets, or the business owns or control
- Liabilities, or the debts of the business
- Owner’s equity, which represents the owner’s investment in the business minus the owner’s liabilities
Cash Flow Statement
It is the incomings or the outgoings for making a cash flow statement in the business over a period of time. The cash flow may be from
- investment activity that shows cash flow from the purchase and sales of assets,
- operating activity that shows cash flow from basic activities of a business, and
- financing activities that represent cash flow statement that is generated or spent.
Statements of Changes in Equity
This statement details the changes in the owner’s equity over a reporting period. It is derived from the net profit or loss during the period, the shared capital, dividend payments, gains or losses, and the effects of a change in accounting policy.
We have financial statements in Excel and statements in pdf available for download here so you don’t have to worry too much if you are planning to create one.
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Why Financial Statements?
Every business mission statement should include the idea to prepare a financial statement. So, when the investors, creditors, and shareholders ask for proof that your business is financially healthy, you can just show them your financial statement. Not only that, preparing a financial statement can help you make a crucial decision for your company, provide you an on-time payment from your customer and vendors and lastly, a financial statement can prepare you for tax time so that you would not miss paying it.
Using Financial Statements
Financial statements are more than just reports of the financial condition of your business. It is also a tool that business owners use to determine the company’s strengths and weaknesses. Business owners commonly use financial statement to do the following:
- Perform financial analysis before making investment decisions.
- Resolve problem statements regarding finance.
- Decide whether to continue or discontinue a part of the business agreement.
- Make or purchase materials that are essential to the business.
- Acquire, rent, or lease a specific equipment to increase the production of goods.
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Limitations of Financial Statements
Business owners should be mindful of the limitations of financial statements. These are the circumstances that could put the business at a risk. Apart from risk management, knowledge of these circumstances could help business owners take action earlier, prompting them to investigate further and create a need statement or needs analysis.
Five major limitations in financial statements to look out for:
- Inflationary effects. The assets and liabilities in the balance sheet will appear low if the inflation rate is high, since they are not adjusted for inflation. This limitation applies to long-term assets.
- Intangible assets not recorded as assets. Instead, any amount that is made to create this asset are subject to an immediate charge to expense.
- Not always comparable across companies. Companies use different accounting principles. This is why the financial statements of one company are not always comparable to other companies.
- Subject to fraud. Sometimes, members of the accounting team may alter the financial statement. This is due to pressure to free report examples excellent results, caused by bonuses or incentives in the event of reported sales increase.
- Not verified. This is when financial statements have not been audited. Their results may come up inaccurate because no one has examined the accounting policies and practices to ensure an accurate financial statement.