Preparation of Financial Report
A Financial Report or Financial statement consists of an Income statement, Balance sheet, Cashflow statement, and Statement of Changes in Equity. A Financial report is one of the most important sources of information about a company’s financial performance over a specified period. Financial reports are used by investors, business valuators, equity research analysts, company management, tax authorities, suppliers of capital, investors, etc. Financial statements are usually prepared on a quarterly and annual basis.
Financial reports provide the most in-depth information about a company’s historical financials, which act as the basis for the company’s analysis and valuation-related activities. The company’s own management also uses financial reports to understand the business’s financial performance and financial position to make better strategic decisions. Auditors, taxation authorities, and other regulators also rely upon financial reports for their respective purposes. A financial report is a rich source of information and an essential document for various stakeholders of a company.
The following are the major component that has to be there in a financial report:
- Income statement: An income statement is an essential component of any financial report. It provides information regarding the company’s financial performance over a given period, usually one year. It starts with Revenues (the top line) and goes down, computing Gross profit, Operating profit, Taxes, and Net income. Preparing an income statement requires a few supporting schedules, such as Cost of goods sold (COGS) calculation, etc.
- Balance sheet: Unlike an income statement, a Balance sheet provides information about a company’s financial position as of a specific date. The balance sheet has two parts, Assets and Liabilities & Equities. Assets represent what a business owns, liabilities represent financial obligations, and the balance is termed Equity or Owner’s interest.
- Cash flow statement: A Cashflow statement is the most reliable financial statement as it is difficult to manipulate cash balances. The cash flow statement also provides information regarding financial performance over a specified period but on a cash basis instead of an accrual system followed by an income statement.
- Statement of changes in Equity: It starts with the Opening equity balance and, after making all the adjustments for the period, reaches at Closing balance for equity. It gives an excellent idea to equity stakeholders of how and why their capital changed in the current balance sheet from the previous year.
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