Iris Perez | January 22, 2020
5 min read
Cheers! It’s the year 2020!
Another year, another celebration, yet another big challenge for upcoming big opportunities in the business world. While most of the people are excited about welcoming the year, accountants/auditors are starting to get busy preparing for the annual financial statement reporting and/or audited financial reports for the year 2019. This big event for businesses will run for about 1-4 months until it’s ready for reporting and submission to different government agencies, stockholders/members and as well as to stakeholders. It’s fun, isn’t it?
But what is financial statements are a critical instrument to a company’s reputation, a tool for innovation, development, opportunity, and success. It gives a glimpse of the company’s performance, how it is doing in its business career and how it should affect the economy and as well as society. It is an essential tool for decision-makers to come up with a plan for the company’s improvement or a strategic move to keep it going a financial statement?
The financial statements mainly comprise the following:
The Statement of Comprehensive Income also known as Profit and Loss Statement is a report that shows the revenues earned and expenses incurred during a specific period. It gives a clear picture of the company’s financial performance, whether it is earning or not. By examining this report, business owners can make relevant decisions for the profitability of the business, some of these decisions include increasing sales or reducing cost. This is also a tool for potential investors to know whether the company is worth investing in.
The Statement of Financial Position as the name states shows the financial standing of the company. It shows the outstanding assets, liabilities and capital accounts as of the given date. This is also called the balance sheet as it illustrates the famous accounting equation A = L + C. One mistake which a business owner makes is focusing only on the income statement and not examining the balance sheet. While it is important to know the company’s financial performance, it is also crucial to know if the company can settle its liabilities. Higher liabilities against assets is a sign that the company is in danger.
The Statement of Cash Flow presents the cash inflows and outflows of the business from three main areas, specifically: Operations, Investments, and Financing activities, during a given time. Not all disbursements can be found in the Income Statement, items such as bank loan principal payment, capital accounts can only be found in Cash Flow Statements. By having a clear picture of the cash flow, business owners can identify if sales are generating enough cash to support all these payments.
The Statement of Changes in Owner’s Equity gives the user a quick look as to how much profit was earned during the period, total capital invested and profits withdrawn. Through this statement, owners can assess how the company’s performance affects their investment.
The Notes to Financial Statements are as important as the other financial statements. Not all financial information can be found in the figures given by the other statements, this is where notes come in. The notes show the accounting policies adopted by the company as well as the schedules and breakdown of accounts. It supports the information stated in the financial statements
Financial Statement Audit
Financial statement report preparation starts with the consolidation of information to translate it into financial information (balance sheet, income statement, etc.). The moment it has been done; it is reviewed by the internal accounting management team to verify the accuracies. Once verified, it is presented to the Board of Directors for approval, then submitted to the external auditor for evaluation and audit for material errors. Any findings shall be discussed by the auditor to the management. Once settled, the auditor shall issue an independent auditor’s report, it will be presented to the board management and submitted to different government agencies and other stakeholders/parties interested.
How is the involvement of external auditor critical in the Financial Statement Reporting?
External auditors are independent auditors that evaluate, analyses and judge the financial statement of the company. They give the financial statement the credibility to present it to different interested parties and can assure that it is free of material error and is highly reliable.
What’s the importance?
Financial Statement is the gateway for the interested parties to understand the business performance and financial structure and to assess whether or not should they get involved through the following set of parties:
If they see that the company is performing well base on the published report, then there’s a greater chance that they will invest more and deals with a great opportunity for the business to grow.
They will make sure that their capital investment will not be put into waste. They will closely monitor how the company performs and must do measures and/or plans to survive indefinitely.
Regulatory agencies like BIR (Bureau of Internal Revenue), SEC (Securities and Exchange Commission), and other (LGUs) local government units seek financial statement reports for revenue collection and compliance purposes. They also collect information to see how the economy is doing in a country as a whole.
It helps employees and management the boost for motivation since their team effort and hard work has been paid off. It is also serving a cause that employees being praised for their commitment, which is a huge importance for the company’s success.
One of the income generators of the company. As business owners, we want to assure that our customers get want they want, create long term relations and provide quality service. Financial statement reports help us sort this out either having difficulty in attaining the profitability mark (meaning, our customer is not satisfied or we need to improve something) or getting the profit we set for it (customers are satisfied and we want to give them more overtime). Both are essential in assessing the company’s strengths and weaknesses.
Suppliers will closely monitor the financial being of the company they are serving so that they can see to it that they can continue to serve the company and provide them the profit they need. When the company results in a profit, suppliers will also be glad and continue building strong relationships. The supplier will also understand the magnitude of service they are about to offer base on the company’s development and performance structure.
Banks and other financial intermediaries primarily require financial statements whenever the business applies for an additional capital structure in the form of loans. Creditors only want to assure that the money they lend will not fall into the wrong hands. Therefore, they look into the financial statements so that they can assess whether or not the company is qualified for a loan program.
Financial statement reporting is not only for internal purposes, but it also serves society by giving the information they need to know. It acts as a marketing tool and speaks on behalf of the company that gives the edge to be known to people and build a greater value or goodwill.
Companies whether SMEs, Conglomerate or Multicompanies need financial statement reports. Without it, you are just like running uncertainly with no definite goal. This must serve as our understanding that financial statement reports help our company’s economy grow and make a better and brighter nation.