A financial statement notes the financial position and the success of an enterprise. For companies that are subject to the obligation of maintaining accounts, the annual balance sheet and profit and loss account are the main elements of the annual report. Accounting is carried out by certified accountants.
This information is useful for the administration, managers, regulators and other stakeholders such as shareholders, creditors or owners. Most of these reports are the final product of accounting and are prepared in accordance with the generally accepted accounting standards or reporting standards.
The financial statements are the most important tools that organizations have in the evaluation of the operational state they find themselves. The financial statements have two basic functions: It provides information on the economic situation of the company and establishes the basis for calculating the distribution of the result.
Information function: The documentation of the assets, liabilities, financial position and results of the balance sheet is the basis for planning and future decisions of the company. The result of the financial statements is used by banks and other creditors as a criterion for lending, and can be used in legal proceedings as evidence.
Payment calculation function: The financial statements are the basis for taxation of the company and for the detection of performance-related payments such as dividends and bonuses.
The profit and loss account represents the various stages of the result and includes the impact of taxation. As the remaining profit or loss is ultimately distributed among the business owners depending on the legal status of the company.
In addition to contractual arrangements are also legal rules to observe, for example, the liability of individual partners, the recruitment of reserves and the need for the formation of profit and loss carry-overs. Decisions on the allocation of surplus are part of the disclosure requirements.
The evaluation of financial statements is carried out during the annual analysis. And the key indicators assessed in the balance sheet and profit and loss account include capital adequacy, asset growth, profitability, liquidity or quotients for financing and investment.
The main components of the financial statements are:
– Balance sheet (also called statement of financial position)
– Income statement (profit and loss statement or profit and loss account)
– Statement of changes in equity (statement of changes in net assets)
– Statement of cash flows
– The notes to the financial statements
These financial statements are the basis of other reports, charts and graphs for determining the profitability, solvency, liquidity, market value and other parameters that are critical when managing the finances of an institution.
The annual statements of certain companies, especially larger corporations, in certain sectors (insurance, banks) or commercial enterprises of the public sector must be examined by independent institutes and then published in the commercial register (disclosure).