Financial Statement and Annual Report Summary

Financial statements are reports prepared by a company's management to present

the financial performance and position at a point in time. A general-purpose set of financial
statements usually includes a balance sheet, income statements, statement of owner's equity,
and statement of cash flows.

Financial statements are a collection of summary-level reports about an organization's

financial results, financial position, and cash flows. They are useful for the following
reasons:

 To determine the ability of a business to generate cash, and the sources and uses of
that cash.

 To determine whether a business has the capability to pay back its debts.

 To track financial results on a trend line to spot any looming profitability issues.

 To derive financial ratios from the statements that can indicate the condition of the
business.

 To investigate the details of certain business transactions, as outlined in the

disclosures that accompany the statements.

The standard contents of a set of financial statements are:

 Balance sheet. Shows the entity's assets, liabilities, and stockholders' equity as of the
report date. It does not show information that covers a span of time.

 Income statement. Shows the results of the entity's operations and financial activities
for the reporting period. It includes revenues, expenses, gains, and losses.

 Statement of cash flows. Shows changes in the entity's cash flows during the
reporting period.
 Supplementary notes. Includes explanations of various activities, additional detail on
some accounts, and other items as mandated by the applicable accounting framework, such
as GAAP or IFRS.

If a business plans to issue financial statements to outside users (such as investors or

lenders), the financial statements should be formatted in accordance with one of the major
accounting frameworks. These frameworks allow for some leeway in how financial
statements can be structured, so statements issued by different firms even in the same
industry are likely to have somewhat different appearances. Financial statements that are
being issued to outside parties may be audited to verify their accuracy and fairness of
presentation.

If financial statements are issued strictly for internal use, there are no guidelines, other than
common usage, for how the statements are to be presented.

At the most minimal level, a business is expected to issue an income statement and balance
sheet to document its monthly results and ending financial condition. The full set of
financial statements is expected when a business is reporting the results for a full fiscal year,
or when a publicly-held business is reporting the results of its fiscal quarters.

Objective of financial reporting

The Primary Objectives of Financial Reporting

i. Provide economic information so users (internal and external) can make informed
decisions.
ii. The purpose of financial accounting is to provide information that is useful to present and
potential investors and creditors to help them reach decisions in an informed manner.

The Secondary Objectives of Financial Reporting

 i. Reflect future cash receipts to investors and creditors
ii. For investors, future cash flow from investment
iii. Dividends
iv. Receipts from sale of stock
v. Decision to hold or sell stock or buy stock in the first place
vi. For creditors, interest plus repayment of loan
vii. Reflect future cash flows to company
viii. Ability to pay outside parties
ix. Reflect resources and claims to resources

The Classified Balance Sheet

a. Current and Fixed Assets

Current assets

Current assets will be converted to cash or consumed within the normal operating cycle or within
one year, whichever is longer cash, accounts receivable, and inventory are current assets because
they are cash or will be realized in cash within one year short-term investments or marketable
securities are investments made for the short term prepaid assets represent a prepayment of
expenses such as rent or insurance.

Noncurrent assets

Noncurrent assets have an expected value beyond one year investments: securities not expected
to be sold within one year land or buildings not currently in use funds reserved for a special
purpose property, plant, and equipment: productive assets for use in operations rather than resale
intangible assets: lack physical substance; rights rather than things.
 b. Capital and liabilities

Current liabilities

It will be satisfied with next operating cycle or one year, whichever is longer.

Long-term liabilities

It will not be paid within a year or the operating cycle, whichever is longer.

Stockholders’ equity: owners’ claims on assets = contributed capital + retained earnings

Contributed capital includes:

Capital stock

Common stock: most basic form of ownership

Preferred stock: form of capital stock that has preference to common stock in some respects

Income Statement

The Income Statement is one of a company’s core financial statements that shows their profit
and loss over a period of time.  The profit or loss is determined by taking all revenues and
subtracting all expenses from both operating and non-operating activities.
The income statement is one of three statements used in both corporate finance
(including financial modeling) and accounting. The statement displays the company’s revenue,
costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid,
and net profit, in a coherent and logical manner.
 
The statement is divided into time periods that logically follow the company’s operations. The
most common periodic division is monthly (for internal reporting), although certain companies
may use a thirteen-period cycle. These periodic statements are aggregated into total values for
quarterly and annual results.
This statement is a great place to begin a financial model, as it requires the least amount of
information from the balance sheet and cash flow statement. Thus, in terms of information, the
income statement is a predecessor to the other two core statements.

Retained Earning

The statement of retained earnings (retained earnings statement) is a financial statement that
outlines the changes in retained earnings for a company over a specified period. This statement
reconciles the beginning and ending retained earnings for the period, using information such as
net income from the other financial statements, and is used by analysts to understand how
corporate profits are utilized.

The statement of retained earnings is also known as a statement of owner's equity, an equity
statement, or a statement of shareholders' equity. Boilerplate templates of the statement of
retained earnings can be found online. It is prepared in accordance with generally accepted
accounting principles (GAAP).

Statement Of Cash Flow

The Statement of Cash Flows (also referred to as the cash flow statement) is one of the three
key financial statements that report the cash generated and spent during a specific period of time
(e.g., a month, quarter, or year). The statement of cash flows acts as a bridge between the income
statement and balance sheet by showing how money moved in and out of the business.
 
Three Sections of the Statement of Cash Flows:
Operating Activities: The principal revenue-generating activities of an organization and other
activities that are not investing or financing; any cash flows from current assets and current
liabilities
Investing Activities: Any cash flows from the acquisition and disposal of long-term assets and
other investments not included in cash equivalents
Financing Activities: Any cash flows that result in changes in the size and composition of the
contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends)
 
Others Elements Of An Annual Report

i. Although the formats of annual reports vary, certain additional elements have become
standard in the annual reports of publicly held companies.
ii. Letter from the President or Chairman of the Board
iii. Product review
iv. A management report briefly states that responsibility for information lies with the
company, checked by an audit
v. Auditor’s report is an opinion, based upon certain tests
vi. Management discussion and analysis provides explanation for certain amounts in the
statements
vii. Financial statements
viii. Notes to statements satisfy the requirement for full disclosure discloses all the relevant
facts to a company’s results and financial position