If you want to discover how well a company is doing, look at its financial accounts. Is there enough money in the bank to cover all of your expenses? Is the business profitable? Have your assets been sucked dry by debt? Financial statements, such as the balance sheet, are used by persons both inside and outside your organization.
Meet the Propositions
Because so many people rely on financial statements for information, the formats have been standardized by federal legislation and generally accepted accounting standards (GAAP). Financial statements for external users must conform to certain standard formats, which is a significant distinction between internal and external users’ statements. Internal users, such as your company’s management or owners, can request information in any format that suits them, or you can create your own.
The following are the most important financial statements:
The income statement is a financial statement that indicates how much money you made and how much money you spent. It covers money you’ve earned but haven’t received, as well as the money you owe but haven’t received. This statement indicates the profitability of the company.
The cash flow statement is a financial statement that shows how much money is exchanged. This information is crucial because a lucrative business can’t pay its bills if clients don’t pay promptly enough. Cash flow equals income if you operate on a cash basis.
The balance sheet is similar to an equation, with your entire assets on one side of the equal sign and your total debts and equity on the other. This statement reveals how much the business is worth in addition to its debt.
The additional notes go over a variety of technical topics and subtleties that put the big three into context.
Internal Users of Financial Statements
Internal financial statement users are divided into three categories: management, owners, and, in some cases, employees. The owners of many small firms are also the managers. In a partnership, for example, the partners are usually the primary users of financial data.
Financial statements are mostly used by managers because they require the information to do their duties. They must make judgments such as whether to take on more debt or how to keep cash flowing. Making those calls necessitates a thorough understanding of the company’s finances.
The statements can be used by owners to determine whether their investment is safe and whether the company is giving a satisfactory return on their investment.
Financial statements are used by some staff, such as accountants and the finance department because it is part of their job. If other employees have access to the data, they can use it to determine if the company is in good shape or if it’s time to leave.
Management needs distinct information than other internal users of financial statements because they must make business decisions. They may, for example, require income statements for each product line or store rather than for the entire company.
External User Statements
External users of financial statements are those who are interested in your finances but aren’t affiliated with your company. They are divided into many more groups than internal financial statement users:
Lenders are people who lend money. If you want money from the bank, you’ll have to show them your financial information first.
Regulators are people who are in charge of regulating things. If you’re a publicly-traded company, you’ll have to send copies of your financial statements to the Securities and Exchange Commission.
Investors from outside the company. Before writing you a payment, stockholders and venture capitalists, like lenders, will want to evaluate your financial accounts.
Creditors are a type of debtor. Your creditors may wish to double-check your statements if you owe money or are late on payments. Before extending credit, suppliers may examine your financial situation.
Unions are a type of organization. The union may decide you can give a more generous employment package if your cash flow and income are consistent.
The financial statements of publicly traded corporations are open to the public. Anyone interested in your company has the potential to become an external user. Customers, competitors, and the media might all be included.
Why Are Financial Statements Important to Tax Authorities?
External users’ financial statements must adhere to GAAP or comparable accounting standards. That isn’t to say they all desire the same thing. Investors may be more concerned with your financial performance, whereas lenders may be more concerned with your present debt load.
A company’s financial statements serve as a documented record of its financial activities. Financial statements provide essential information about your company’s overall financial situation, such as areas of financial strength or weakness, to you as a business owner. Tax authorities rely on financial statements to assure the correctness of taxes and extra duties declared and paid by your business.
Financial Statements Types
A balance sheet, income statement, cash flow statement, and statement of owners’ or shareholders’ equity are four main financial statements that your company may have (retained earnings). A balance sheet summarises your company’s financial status, or what it owns and owes at any particular time. An income (profit/loss) statement shows how much money your business spent and received over a given time period. Cash flow statements show the amount of money transferred between your business and the rest of the world over time. A statement of shareholders’ equity depicts changes in the company’s owners’ or shareholders’ ownership interests over time. One or more of these financial statements may be required by taxing authorities to verify the correctness of a company’s financial accounting and reporting.
Financial Statements Have a Wide Range of Applications
Because all of your company’s financial statements are interconnected, they provide a complete picture of its financial health. Financial statements can help you track your company’s progress and prepare for its future. Tax authorities want accurate financial statements to analyze your financial condition. They give your accountant, tax preparer, or the Internal Revenue Service (IRS) concise information to evaluate your tax situation.
Financial Statements and the Parties Involved
Managers, employees, owners, shareholders, and anybody else who is directly connected to your business may be involved with your financial statements on the inside. Banks, investors, tax authorities, and other parties may need financial information from your company for a variety of reasons, including financing or potential investments. The financial statements of a corporation are an essential instrument for making business decisions, preparing an annual report for shareholders, and calculating taxes. The statements will be used by tax authorities to assess your company’s tax liability.
Legal and Auditing Issues
If your company is ever subjected to a financial audit, it will most likely be conducted on behalf of a tax body by an independent accountant or auditing firm. An annual internal audit may be performed as a courtesy to present shareholders and to assure the truth and fairness of all financial statements. An audit guard against the misappropriation or misuse of funds and enables legal recourse if money is misappropriated. An auditor will almost certainly need access to all of your company’s major financial accounts.
The Importance of Accounting Standards
As a business owner, you recognize the importance of precise accounting, but you might not realize why accounting standards – laws with acronyms like GAAP and IFRS – are so important. They wouldn’t be if you were the only one who needed to view your accounting, but investors and regulators may go at your books as well. Outsiders can understand what they’re reading if you follow accounting standards.
Investors, business owners, and regulators are all on the same page when it comes to accounting rules. It is simple to measure performance when all organizations use the same accounting practices. The guidelines also make it difficult for corporations to use accounting’s grey areas for their own gain.
Accounting Standards Have a Long History
Accounting rules in the United States are codified in the Generally Accepted Accounting Principles (GAAP) (GAAP). The Financial Accounting Standards Board defined the GAAP rules into specific standards during the Great Depression of the 1930s (FASB). The FASB is a private organization, not a government agency. The government, on the other hand, mandates public firms that sell stock on an exchange to follow GAAP.
The International Financial Reporting Standards (IFRS) are a collection of norms that apply to much of the remainder of the world. Some standards differ between IFRS and GAAP, such as how intangible assets should be treated in financial reporting. The Financial Accounting Standards Board (FASB) and other organizations are striving to harmonize the standards. Meanwhile, IFRS isn’t a problem if you’re an American company, but if you want to expand internationally, you’ll need two sets of financial statements, one created to GAAP standards and the other to IFRS.
Why Are They Important?
Your company ledgers — how much you spent and earned this week – are critical for managing your business finances. Your financial statements, such as the balance sheet, cash flow statement, and income statement, are considerably more interesting to people outside your organization. When investors consider investing in your company or lending you money, the financial statements provide important information:
Your company’s assets
The amount of debt that the company owes
The revenue generated by the company
Without standards like GAAP or IFRS, companies might interpret financial data in any way that made them look
good. Assume you know that approximately 5% of your accounts receivable will not be paid. You must record a 5% bad debt allowance on your financial accounts under GAAP, which makes you somewhat less profitable. Without GAAP, you may dismiss the danger of nonpayment by convincing yourself that everyone will eventually pay up.
Companies may fake their numbers in a variety of ways if they didn’t follow GAAP. You may, for example, change your accounting techniques to reflect your company’s best interests. GAAP mandates that organizations employ the same accounting practices over time.
Many local governments, as well as not-for-profits and state governments, follow GAAP, which gives interested donors and citizens an idea of how well their money is managed and spent. Because private firms do not sell stock to the public, they are not compelled to follow GAAP, yet the majority of them do.
Primary Users of Accounting Information
Accounting data gives a numerical tale about what’s happening in your company. It enables you to identify specific areas for improvement and strategies to expand on your successes by assisting you in understanding how your firm earns and spends money. Your accounting reports also provide you with the information you need to prepare tax returns and request loans. Your accountant uses accounting information to generate financial statements and keep your firm compliant with tax requirements, while your firm uses it to fine-tune operations.
Managers, accountants, and bankers are the key users of accounting data.
Accounting Reports for the First Time
Profit and loss statements, balance sheets, and cash flow statements are the most important financial statements for managers and accountants. These reports, when utilized together, give you a complete picture of how your firm makes and spends money, as well as whether it can afford a new piece of equipment or expansion into a new market.
A profit and loss statement compares taxable revenue against tax-deductible expenses to determine how much money your business has made or lost at the end of the day. A balance sheet is a snapshot of your company’s financial position at a given point in time, displaying how much you own and owe. A cash flow pro forma forecasts your capital inflows and outflows over a given time period.
External Users Examples
You should prepare and organize your accounting data in a way that outside professionals can easily understand and interpret. Your bookkeeping should be simple and accessible if you engage a tax preparer to complete your monthly, quarterly, and annual tax forms. This clarity aids your tax preparer in avoiding errors, and you save money on unneeded professional services incurred as a result of material that takes longer to comprehend.
When your company requests a loan, a banker examines your accounting records. A lender gets an initial impression of your firm based on the professionalism you use when creating your reports, in addition to analyzing your loan-worthiness based on the figures. Your financial records may also be requested by potential investors in your company.
Internal Users Examples
Managers are internal users of accounting data, relying on financial statements to make both short- and long-term financial decisions. Your managers may utilize custom reports to obtain information about operations in addition to conventional traditional accounting reports. Custom reports can provide information on a variety of topics, including manufacturing efficiency and inventory turnover. Instead of enabling just managers to see the data, some forward-thinking organizations share accounting information with all of their employees. Open-book management is a transparent strategy that is founded on the premise that a well-informed staff is better suited to make wise and successful everyday decisions.
What Is a Company’s Annual Report?
An annual report is a way for a corporation to communicate with investors and other stakeholders. Its main goal is to provide financial information to present and potential investors. Employees of a corporation may use the annual report. Employees may want to learn more about the company’s financial situation. The annual report might be useful if employees have stakes in the company through a 401(k), stock options, or a pension. The annual report is prepared by a company’s top management.
The executive-level management of a corporation writes a narrative for its annual report. This part, dubbed “management discussion and analysis,” covers the company’s financial situation. The company’s ability to pay its present debts is the subject of the management debate and analysis. The company’s sales revenue and its ability to afford growth are explained by the executives. The company’s prospects and threats are summarised in part of the management discussion and analysis. The analysis includes some of management’s subjective predictions and judgments.
Statements of Financial Position
The financial statements are at the heart of a company’s annual report. This section contains a balance sheet, a statement of cash flows, a retained earnings statement, and an income statement. The assets, liabilities, and stockholders’ equity of a firm are all shown on the balance sheet. A cash flow statement indicates how much money a company makes from operations, investments, and financing. The income statement shows whether the company has made a profit or lost money. A retained profits statement shows how much net income is paid out in dividends and how much is kept by the company.
Analysis of the Financial Situation
The financial figures in the annual report provide information about a company’s liquidity. A negative cash flow from operations indicates that the business is losing money on its sales. The company’s higher net cash flows from financing activities suggest it may be borrowing too much. If operating costs exceed sales revenue, the income statement will disclose this. A balance sheet will disclose if the company’s assets are mostly short-term or mostly long-term. Short-term assets can be converted into cash more quickly than long-term assets. Short-term debts are more likely to be paid if there are more short-term assets, such as accounts receivable.
Report of the Auditor
An independent auditor’s report is included in annual reports. The auditor’s role is to ensure that the financial statements of the organization are accurate. In this part, you’ll also find out if the financial accounts follow generally recognized accounting rules. The auditor will include a statement in his report stating that the company’s financial accounts are fair and accurate. This is referred to as an “unqualified opinion.” Readers of the annual report should be suspicious of statements if the auditor does not issue an “unqualified opinion.”
Strategic Role of a Chief Accountant
A corporation’s chief accountant can perform a variety of tasks, including overseeing the preparation of all financial records linked to the company, implementing management’s financial strategies, and making investment decisions. As a chief accountant, you may be a member of the senior management team, assisting in the development of long-term objectives. In a larger company, you can also be in charge of a staff of financial experts.
A chief accountant is likely to be a Certified Public Accountant (CPA) with additional certificates such as Chartered Financial Analyst (CFA) or Certified Management Accountant, according to the US Bureau of Labor Statistics (CMA). A chief accountant in a larger company may have worked their way up through the ranks and earned a seat at the management table. Long-term employment as a financial expert in several positions provides you with a unique insight into operations and corporate culture, making you well-suited for the position of chief financial officer.
Communication is essential.
As a chief accountant, you’ll have firsthand knowledge of all the company’s financial transactions, debt and earnings ratings, and strategic goals, as well as the opportunity to communicate with most department heads and other key staff. You must acquire good communication skills that extend beyond your direct financial personnel, such as the ability to communicate corporate goals to the full staff and the ability to translate complicated financial jargon to owners or board members.
One of the chief accountant’s main responsibilities is to ensure that your organization complies with both internal and external financial obligations. Payroll taxes, profit/loss statements, FCC regulatory filings, and insurance requirements all need to be kept current. Payments to vendors on time can have a big impact on a company’s capacity to keep inventory. In addition, the chief accountant frequently supervises or coordinates with an independent auditor to conduct annual or quarterly audits of the company’s books and various department ledgers.
Chief accountants are progressively taking on larger roles in developing organizations, according to the International Federation of Accountants. Because of their unique view on the financial implications of future initiatives, they frequently play a vital part in strategic planning. Aside from internal communications, well-spoken accountants are also in charge of disseminating financial facts to shareholders and the media. A chief accountant, often known as a CFO or Chief Financial Officer, advises, educates, and consults on all financial matters that influence the organization.
How to Create Your Own Investment Statements Using Excel?
Using a template from the Microsoft Office website, you can construct your own investment statements. There is a “Statements” category in these free templates with predesigned forms for the Excel application. In an Excel worksheet, a “Personal Financial Statement” template comprises two fillable forms. On the “Personal Finance Statement,” one spreadsheet provides your information. The second worksheet has sections for “Assets” and “Liabilities,” as well as “Details.” To make your assertions more readable, use Excel’s editing tools to change the fonts.
1.Open the Excel spreadsheet application. A new worksheet appears on the screen.
2.On the command ribbon, select the “File” tab. A command list appears.
3.On the left pane, select the “New” tab. The middle pane displays a list of “Office.com Templates.”
4.To view the gallery of thumbnail images, click the “Statements” image link.
5.Select “Personal financial statement” from the drop-down menu. In the right pane, you can see an enlarged version of this template.
6.”Download” should be selected. The template is duplicated in a new Excel spreadsheet.
7.Fill out the “Personal Finance Statement” fillable form with your financial information.
8.Near the bottom of the screen, click the “Details” sheet tab. A fillable form is displayed on the “Details” worksheet.
9.On this form, fill in the details for the “Assets” and “Liabilities” areas.
10.This statement should be saved as an “Excel Workbook.” In the “Filename” text box, type a new name for the file and then click “Save.”
How to Find a Financial Statement on Google Finance?
Google Finance is a Google-created website that shows the most recent financial news, global market data, and statistical market trends derived from Google’s domestic search data. Google Finance includes detailed financial data for companies listed on the NASDAQ and NYSE stock exchanges, in addition to overall market data. You may simply access a corporation’s most current financial statements by typing a stock symbol into the Google Finance search box.
1.Go to www.google.com/finance in your web browser to access the Google Finance website.
2.In the search box in the center of the screen, to the right of the Google Finance logo, type the stock symbol or c.ompany name, then click the “Get Quotes” button. Type “Apple Computer” or the stock symbol “AAPL” to see Apple Computer’s financial statement, for example. The stock symbol of a corporation can be found in its printed prospectus or on your broker’s statements. Google Finance provides a page with the most recent Apple stock price, recent Apple news stories, and crucial statistics such as net profit margin and returns on average equity.
3.On the left-hand side of the page, click the “Financials” link under the “Company” column. The company’s quarterly income statement is displayed on Google Finance.
4.Click the tabbed buttons at the top of the income statement to see the corporation’s balance sheet and cash flow.
5.By clicking the “Quarterly Data” and “Annual Data” links at the top of each financial statement, you can switch between quarterly and annual data.
What a Financial Statement Should Look Like?
Accounting is frequently used by business owners to assess their company’s financial success. Accounting is in charge of keeping track of and reporting on a company’s financial transactions. While a variety of internal accounting reports can be used by business owners to make decisions, financial statements are usually the final product of the accounting process. Financial statements show the overall amount of financial data in the general ledger of the organization.
The three most frequent financial statements are the income statement, balance sheet, and cash flow statement. Each statement is used by business owners to assess various aspects of their company’s financial data. A cash flow statement is not required for smaller or home-based firms that use cash basis accounting systems. Companies that follow the accrual accounting system are the only ones that use cash flow statements. The cash flow statement is no longer necessary because cash basis accounting appropriately reports cash for the business owner.
Profit and Loss Statement
For small business owners, the income statement is the most important financial statement. For a given time period, the income statement contains all sales revenues, cost of products sold, and costs. This information is usually shown vertically on most income statements. On the financial statement, sales income comes first, followed by the cost of goods sold and costs. The gross profit of a corporation is the difference between sales revenue and the cost of items sold. The income statement’s final number is net income, which is calculated by subtracting gross profit from the monthly expenditure.
All assets, liabilities, and owner’s equity are listed on the balance sheet. This statement can be formatted in either a one-column or two-column vertical manner. All assets are listed first, liabilities are listed second, and owner’s equity is listed third on one-column balance sheets. Assets are listed in their own column on the left side of two-column balance sheets. In the right-hand column, liabilities are listed first, followed by owner’s equity. Current (short-term) assets and liabilities are normally listed first in their relevant columns on balance sheets. The non-current (long-term) assets and liabilities are at the bottom of their respective columns.
Statement of Cash Flows
Operating, financing, and investment are the three sections of the cash flow statement. The cash inflows and outflows from specific items are listed in each area of the cash flow statement. Depreciation, net income adjustments, and changes in accounts receivable, liabilities, inventories, and other operating items are all included in the operational section. Capital expenditures, investments, and a miscellaneous part are all included in investing. Dividends, shares, external financing, and a miscellaneous component are all included in the financing section. This statement follows the same vertical structure as the rest of the financial statements.
Smaller or home-based businesses need not be concerned about the structure of their financial statements. Business leaders should concentrate on delivering financial reports that accurately depict their company’s financial health. Internal financial accounts are largely utilized to make decisions. If necessary, business owners might hire a professional accountant or a public accounting firm to assist them in preparing formal financial statements. Professional accountants can also help small businesses with tax planning.
Definition of Fiscal Audit
Throughout the year, businesses undertake a variety of audits. Audits ensure that inventory counts match computer records, that costs are within budget, and that corporate investments are profitable. Businesses and governments, on the other hand, may not necessarily conduct business using the calendar year, which runs from January 1 to December 31. Every year on October 1st, the United States, for example, begins a new budget.
Period of Fiscal Audit
For tax purposes, a firm sets a yearly reporting period when it first starts up. Periods of fiscal auditing can begin at any time. For example, suppose your company’s fiscal year runs from July 1 to June 30 of the following year. This time is covered by the fiscal audit. Businesses are not compelled to select a fiscal period; instead, they can use the calendar year in the same way that individuals do. Your corporation, on the other hand, is required to conduct a financial audit every year.
The primary goal of fiscal auditing is to determine a company’s financial health. Internal auditors search for improper expenditures, misallocated expenses, and other accounting mistakes. They compare the spending of each department to the annual budget. The annual budget aids organizations in achieving their objectives and is required if your company wants to make a profit. Before an external audit, a company may undertake its own internal audit. If there is significant unauthorized or unaccountable spending, management may utilize the findings to strengthen training or security measures.
Revenue, earnings, and debt are all evaluated by external auditors. They figure out how much working capital is available to run a business. Before lending money to the company, potential creditors may conduct an external audit of the books. The Internal Revenue Service (IRS) may also conduct an audit to confirm that the correct amount of tax was paid. If federal officials suspect fraud, such as a business filing false claims with Medicare, they may get a warrant enabling an audit.
Fiscal Audit Questions
At each audit, the Internal Revenue Service asks the same set of questions. Other ownership interests are addressed in some of these concerns. You must explain whether any of the owners own other businesses if they have other sources of revenue, and which of those other firms employ people
Audits of the financial situation are an important aspect of the planning process. Management examines whether departments are over-or under-funded, which goods have excess expenses that eat into corporate revenues, and which products or services have exceptional results by looking at spending patterns. This data, along with that from numerous other reports, is used by management to adapt the company’s business plan for the most efficient use of finances.
How Are an Owner’s Drawings Categorized for Accounting Purposes?
You own all of the equity in a sole proprietorship or a single-owned LLC. You can use whatever funds are left over after paying your invoices for personal use or to reinvest in the firm. For tax purposes, any drawing you receive from the corporation does not need to be posted. However, you’ll want to keep track of your withdrawals to establish your own accounting system and ways for calculating your earnings and losses.
The initial contributions you made to create the firm, as well as any further funds you add as you grow, make up your stock in the company. As a business owner, your equity in the company comprises any revenue generated from the sale of your products or services. With each sale and personal investment, your ownership grows. Payment of bills, taxes, and the purchase of office equipment and supplies all reduce your equity. When you take a loan from the corporation, your equity drops as well.
Your assets should match your liabilities plus your owner’s equity on your balance sheets. Account for your assets regularly — weekly, monthly, or quarterly — by adding up your cash, outstanding payments from clients, and the value of any equipment you hold. Prepaid insurance should be included on the asset side of the balance sheet. Cash payments to yourself, bills paid, and your capital, or owner’s equity, are all examples of liabilities. The cash withdrawn from your assets should be balanced by the remaining equity in your company, so both columns should be equal. As a result, assets are equal to liabilities plus equity.
In contrast to the balance sheet, which depicts your company’s financial health at any given point in time, your withdrawals are usually not reflected in a balanced income statement, which covers a period of time. You can tell if you’re losing money or making money by tracking your daily income. Because it’s money taken out of the firm, report your withdrawal in the debit column on your income statement. Your financial performance is depicted in the income statement. To balance your ledgers, apply your withdrawal from the income statement to the equity line.
When you’re a sole owner, you don’t have to declare your draws or money taken out of the business. For tax purposes, it’s presumed that whatever money is left over after expenditure is profit. Whether you spend the money or keep it in a company bank account, you must pay taxes on it. You don’t file separate personal and business income taxes as a sole owner; they’re all combined. In your personal pay or draw, there is no line item to write. If you choose to form a limited liability corporation or LLC, your tax filings will be the same whether or not you work for the company. The main distinction is that if you don’t actually work for the company — such as as a real estate investor — you don’t have to pay self-employment tax or fill out a SE form. Your passive income is also reported on a Schedule E form rather than a schedule C form.