Financial statements: a window to business health and the future of investment

Financial statements: a window to business health and the future of investment

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In the growing and dynamic world of business, companies’ financial statements play a vital role in understanding and evaluating performance, as they are the window that opens before us to take a comprehensive look at the health and control of the company over its funds and resources by providing transparent and reliable financial reports to investors, internal and external alike. It is worth noting that when we examine the financial accounts, we see that they include many significant factors such as revenues, costs, assets, liabilities, and profits, as well as losses. These elements provide us with a detailed picture of the company’s performance over a specific period of time, assisting us in determining the company’s strengths and weaknesses, as well as understanding the challenges and opportunities it faces. As a result, we will go over in detail what financial statements are, what types they are, and when they are prepared. Follow along with us.

What are financial statements?

It is a set of financial reports that reflect the company’s performance and financial position during a specific period of time and aim to provide comprehensive information about assets, liabilities, revenues, expenses, net profits, and other important financial elements.

What are the five financial statements?

The types of financial statements of companies are five, namely: the statement of shareholders’ equity, the income statement, the statement of financial position, as well as the statement of cash flows and the statement of comprehensive income, and the above can be summarized as follows:

Income Statement

It is one of the basic financial statements and provides information about the revenues and expenses of the company during a specific period of time, usually annual or quarterly, and aims to calculate the net profit or loss of the company during the relevant period.

Revenues include sales and revenues from other activities, while expenses include production costs, marketing, management, financial benefits, and others.

Statement of Financial Position

It reflects the financial state of a company at a specific point in time and shows the balance between assets, liabilities, and equity, including cash, accounts receivable, and other fixed assets.

Liabilities include outstanding debts, loans, and other obligations of the company.

Statement of Cash Flows

It shows the movement of cash in the company during a specific period of time. This list includes cash flows from operating activities (such as cash flowing from sales and operating expenses), investment activities (such as purchasing fixed assets and selling investments), and financing activities (such as loans and dividends).

This list helps evaluate a company’s ability to generate and manage cash.

Statement of Shareholders’ Equity

The Shareholders’ Equity Statement highlights changes in the company’s equity over a specific period of time, including financial contributions from shareholders, dividends, capital changes, equity, and other impactful changes.

It is one of the financial statements of companies that helps in understanding the distribution of dividends and changes in equity of the company over the specified period.

Statement of comprehensive income

This statement reflects profit and loss arising from non-financial events, such as changes in the value of assets or changes in foreign exchange rates. It is presented in conjunction with the regular income statement and provides a more comprehensive picture of the company’s financial performance.

When are companies’ financial statements prepared?

Financial statements for companies are usually prepared at the end of the accounting period, which is the period in which financial transactions are recorded. In general, the accounting period is a full year linked to the financial year, but it may also be a quarter or half a year, depending on the circumstances, legal requirements, and policies that may vary from one country to another.

Principles of preparing financial statements

The preparation of companies’ financial statements is based on specific foundations and principles that guarantee the accuracy and comprehensiveness of financial information. Below, we review the most important main points of those foundations:

Historical cost principle

This principle is one of the main foundations for the preparation of financial statements, according to which assets, liabilities, and financial transactions are recorded at their original cost, meaning that the recorded value reflects the cost that the financial element acquired when it was obtained, and this principle enhances reliability and comparison between different periods.

The verifiable value principle

The realizable value principle indicates that assets and liabilities must be accurately valued according to their current fair value. This means that assets and liabilities are valued based on their true market value, which contributes to providing a true picture of the company’s financial situation.

The principle of honesty and disclosure

The principle of honesty and disclosure is an important basis for preparing financial statements for companies. According to this principle, the financial statements must be honest and reliable and reflect the financial facts and events accurately and transparently. It is worth noting that this requires the disclosure of all necessary and important information to understand the company’s financial position, including accounting policies followed and estimates used.

Matching principle

This principle requires matching revenues and related expenses in the same accounting period. This therefore means that revenues must be recorded in the period in which they are generated, regardless of the distribution of cash or the recording of invoices.

Likewise, expenses should be recorded in the period in which they are used, regardless of the cash payment.

The difference between financial statements and financial reports

The difference between corporate financial statements and financial reports is due to the nature and purpose of each, as follows:

Financial Statements

It is a specific set of financial reports, aiming to summarize and present important financial information about the company over a specific period of time.

Financial statements usually include five main reports: the income statement, the statement of financial position, the statement of cash flows, and the statement of shareholders’ equity, in addition to the statement of comprehensive income.

Financial Reports

It includes two types:

Periodic Financial Reports

These reports include notes and disclosures supplementing the financial statements and aim to provide additional and non-financial information to assist in decision-making.

These reports provide deeper analysis and detail about the financial results and financial performance of the company.

Non-periodic reports

These reports are prepared as needed and aim to monitor the company’s financial performance in specific aspects or for special purposes. These reports may include in-depth financial analyses, reports on a specific project or sector of activity, in addition to reports on investment strategies, or any other reports that meet the needs of internal and external users.

Exercises on preparing financial statements

There is a company, and let us assume that its name is (B). We will review below the account balances appearing in the trial balance of this company for the year 2023 AD:

Account Name Credit Balance Debit balance
Money capital 36000  
Revenue 30000  
fund   30400
Electricity Expenses   2000
Bank   19600
Marketing expenses   1600
Salaries   16000
Rental expenses   7000
Accrued revenue   400
Credits 11000  
Total 77000 77000

Second: Closing of Revenues

Statement Credit Balance Debit balance
From A/Revenue   30000
profit and loss 30000  
Close the revenue account in the income summary account.

 

Third: preparation of the income statement

Statement Amount
Revenue 30000
Operating Expenses:

Rental expenses

Electricity Expenses

Salaries

Marketing expenses

26600
Net Income 3400

Fourth: statement of changes in equity

Statement Amount
Net profit 3400
Capital at the beginning of the accounting period 36000
Net equity at the end of the period 39400

Fifth: Closing of Expenses

Statement Credit Balance Debit balance
From profit and loss 26600  
To:

 Rental expenses

marketing expenses

Electricity Expenses/

 Salaries/

 

 

7000

1600

2000

16000

 
Close the expense account in the income summary account.    

Sixth: Statement of Financial Position

Statement Amount Total
Total Assets:

Bank

fund

Accrued revenue

         

19600

30400

400

 

 

50400

Total Liabilities and Equity:

Money capital

Creditors

Business Owner Account

  

36000

11000

3400

 

 

50400

Conclusion

Qoyod
Qoyod

When it comes to companies and their success, financial statements play a crucial role in bringing transparency and trust to the market. However, it is undeniable that these statements can be dry and boring for many people who are not accounting or finance professionals. So comes the role of the Qoyod accounting program, which makes you learn its language and its secrets, whether you are an investor, a financial analyst, or an aspirant to work in the business world. Understanding these lists gives you real power, as they are the key to making smart and informed investment decisions, identifying emerging financial opportunities, evaluating the health of companies, and developing your financial analysis skills.

Finally, we would like to point out the importance of Qoyod in this regard, as it issues financial statements for companies and also offers a point of sale system and various electronic invoice systems.

Accounting Software Solutions
Accounting Software Solutions

Now that you know what corporate financial statements are, try Qoyod now for free for 14 days and discover the new and innovative way to turn your dreams into reality with our premium services. 

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