Financial Statements

The means through which the businesses or the organisation communicate their stories are termed as the financial statements of the company. These statements show the financial position along with the profitability of a business at the same time. Moreover, the profitability of a business is shown with the help of an income statement.

The statement of retained earnings represents the changes that occurred in retained earnings between the starting and endpoints of a specific time period, such as a month or a year. However, the balance sheet helps in reflecting the solvency of a company, while also reflecting the financial condition of the business at the same time. In addition, the cash flow statements of a business represent its cash inflows and outflows during a specific time period.

Types of Financial Statements

Balance Sheet

It is also known as the statement of financial position, equity of the owner, as well as reports on businesses’ liabilities and assets.

Income Statement

It is the report on the income, profits, and expenses of a business over a specific period of time. It is also known as the statement of revenue and expense, statement of comprehensive income, and profit & loss report for a company. Moreover, a P&L report offers information regarding the operations that occurred in a business entity. These involve various expenses, sales, etc., during the mentioned period of time.

Statement of Changes in Equity

Also known as the statement of equity or statement of retained earnings, it provides reports regarding the changes in equity of the business over a mentioned time period.

Cash Flow Statement

This statement offers reports on the cash flow activities, operations in the business, investing as well as finance-related activities over a given time period.

Comprehensive Income Statement

This statement includes several other comprehensive income elements which are not involved in the determination of net income.

Applications of the Core Financial Statements in the Financial Modelling

• All the three core financial statements comprise interplay information. Moreover, within these core statements, the financial model uses the trends in the information’s relationship, as well as the trends between the time periods in historical data for forecasting the future performance of the business.
• The preparation, as well as the way of presenting this information, can possibly be way too complicated. However, the steps given are usually followed for developing a financial model.
• Line items are set up for each of the core statements which give the overall format as well as the skeleton that the financial model has to follow.
• The historical numbers are put in all the line items individually.
• At this position, the maker of the model will often make sure that each and every single core statement is reconciling with the data in the other. Such as the ending balance of cash in the statements of cash flow must be equal to the cash account inside the balance sheet.
• A section of assumption is organised in the sheet itself for analysing the trend in all the line items of the core statements amid the periods of time.
• Then, the assumptions from the present historical data are used for making the forecasted assumptions for the same line items.
• Each core statement’s forecasted section will use the forecasted assumptions for populating the values for each line item. Since the user has completed analysing the past trends in making the forecasted assumptions, the historical trends must be followed by the populated values.
• For the calculation of more complex line items, the supporting schedules are used, such as, for the calculation of the balance of debt items and interest expense, the debt schedule is used. Moreover, the amortisation schedule and the depreciation are used to calculate the balance of long-term fixed assets as well as the depreciation expense. In addition, the values will be floating within the three core statements.

Advantages of Financial Statements

• For finding out the capability of a business to produce cash, and the sources along with the uses of the generated cash
• For finding out whether a company has the potential to pay back the debts
• For tracking the finance-related outcomes on a line of the trend to spot any looming profitability issues

Disadvantages of Financial Statements

There are some drawbacks as well in issuing financial statements. For example, there is a possibility that it can be manipulated fraudulently.

Conclusion

The financial statements study material concludes that there are various types of financial statements in accounting. All of them perform multiple and different actions with numerous elements of a business. However, these statements are interconnected with each other and all the information of the business flows within these core statements like cash flow statements, balance sheet, P&L reports, etc.