Classification of Financial Statements

Financial statements assist in portraying an image of cash flows, financial position, and performance of a business entity or a firm. Moreover, they guide the value of the investment already made in the business. These statements are generally used by lenders, management, creditors, and the investment community for the evaluation of a business entity. There are 5 types of financial statements, which are as follows:

• Balance Sheet
• Income Statement
• Cash Flow Statement
• Statement of Changes in Equity
• Financial Statement Disclosures

Balance Sheet

It is a sheet of the balances of assets, equity as well as liabilities in tabular forms. Moreover, assets are usually classified as equipment, property, plant, etc. Liabilities are classified into long-term liabilities as well. In addition, equities are divided into preferred stock, common stock as well as retained earnings, all shown individually. Each and every single line item on a balance sheet has great importance and value at the same time.

Notably, the balance sheet is nothing other than a set of balances. However, the balances may be different every other day. So, a balance sheet is shown at the end of a specific day and date. The last date of the financial year is the day for presenting a balance sheet for the annual report of a particular year. In India, the financial year ends on 31st March every year, but it is different for different countries, such as in the United States, it is 31st December every year.

Companies present the balances of the previous year and also the balances of last to last year for a better and proper comparison. For instance, if the equity balance was Rs 2000 million in 2017 and Rs 1500 million in 2016, the difference of Rs 500 million in the equity of both the years is properly visible. Furthermore, analysts are capable of interpreting as well as understanding the changes with the help of their financial analysis skills.

Income Statement

Income statements are shown for a particular period and not on a date. Moreover, an income statement shows the income calculation for a particular period of time. The main elements present in an income statement are net sales, operating costs, amortisation, depreciation, taxes, interest cost, preferred dividends as well as net income. After eliminating each and every type of cost, a different interpretation of income comes, which is given as follows:

• EBITDA – Earnings before Interest Tax Depreciation & Amortisation
• EBIT – Earnings before Interest and Taxes
• NIBPD – Net Income before Preferred Dividends
• NI – Net Income

Cash Flow Statement

We are aware of the importance of net cash flows while calculating the fundamental or intrinsic values of a business entity. Generating cash has got more importance as compared to the income reported in financial statements. It is because cash is the real source of creation of value and not income that is reported on the income statement. A statement of cash flow is a simple statement of cash generation – it is used by several activities categorised into 3 different activities, which are as follows:

• Operating Activities
• Investing Activities
• Financing Activities

There are multiple factors due to which the net income becomes totally dissimilar from the cash balance and these are as follows:

• Noncash modification to net income
• Alterations in working capital
• Investment
• Inflow and outflow of capital
• Dividend payment

Statement of Changes in Equity

The statement of changes in equity documents gets totally altered in equity at the time of reporting. Furthermore, these changes involve the purchases or issuance of shares, losses, profits as well as dividends that are issued. Generally, this document is not involved when the financial statements are issued internally, as the information provided is not properly useful for the management team of the business entity.

Financial Statement Disclosures

The prior types of financial statements might have a number of footnote disclosures integrated with them while getting issued to users. Some summary-level information that is shown in the financial statements is clarified by these additional notes and these can be way too extensive as well. Moreover, their exact and proper contents are described by the accounting standards that are applicable.

Analysis of Financial Statements

After the publishing of these reports and statements, a lot of analysis happens. Bankers, shareholders, debenture holders, financial intermediaries, financial analysts as well as all other stakeholders are the main and primary users of these financial statements.

Conclusion

There are multiple and different types of financial statements in accountancy, which are useful for various activities in the management and maintenance of the financial and transaction records of a business entity or a firm. Moreover, these statements have various and dissimilar features and characteristics that make them unique and different from each other. In addition, all these financial statements are essential for a business or a company to survive. Also, these financial statements guide the value of the investment already made by investors in a business.