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Financial Statement: What Is It?
A financial statement refers to the records that showcase your business’s activities and financial state. Or in short, it collects all your company’s financial details. In terms of what details are inside such financial statements, they often come with three main parts: (1) income statement, (2) balance sheet, and (3) cash flow statement. And they all work together to help you understand your company’s current financial health, conduct financial statement analysis, and be audited by accounting officers, government agencies, and so much more.
Based on a US Bank study, 82% of business failures were caused by poor financial management.
Meanwhile, CFO Connect reported a survey that 68.9% of companies were struggling and affected negatively or even worse because of the coronavirus pandemic.
What Is the Purpose of a Financial Statement?
Summarizing your organization’s current financial state is just one function of a financial statement. There are actually more purposes for such statements. For example, you can understand through financial analysis how your corporation could generate cash, including the sources and functions of that budget. The same goes for recognizing how stable your business is in terms of paying back debts, taxes, and other related payments. More so, tracking has never been easier with the statement as you check trend results and profitability problems. Also, you can scrutinize every specific business transaction made from the statement’s disclosed details.
Furthermore, you cannot forget that financial statement applies to numerous types of businesses. Whether you are running a small business, big non-profit project, or even your personal financial statement to apply for a loan, financial statements are at play. Let us also not forget that balance sheets, income statements, and cash flow statements are available inside financial statements. And those examples also have their different purposes which you will learn more about later on.
One of the three major financial statements is the income statement. What exactly is it? This type of statement manifests the detailed performance of an organization in specific periods. In most cases, the sales revenue is showcased at the top-most part. Also, an income statement subtracts the cost of goods sold to get the gross profit. Hence, the income and other expenses will affect the gross profit greatly. Investors and analysts usually depend on the income statement first before the other statements. So, an income statement’s main features are:
A financial statement also contains the balance sheet. This part highlights an organization’s liabilities, assets, and equity. It is standard that assets should be equivalent to the liabilities plus the shareholders’ equity. To start with the asset, focus on the cash and equivalents. It should be equal to the balance derived from a cash flow statement. Therefore, your balance sheet should showcase the changes of every account from time to time. To summarize this, balance sheets would contain the following:
Cash Flow Statement
You already know the income statement’s focus on revenues, expenses, losses, and gains. The same goes for the balance sheet’s concern of the assets, equity, and liabilities. Now, what about the cash flow statement? Cash flow statements outline the net income and use it for non-cash expenses. Those will also be used in balance sheets and cash receipts. In simple terms, the cash flow statement will highlight the changes in cash in every period, including the first balance down to the final cash balance. So, cash flow statements have:
How to Write a Financial Statement
Now let us head on to the main tea, how do you make a financial statement in the first place? You already know of a financial statement’s meaning, importance, and necessary elements to complete it. But the challenge lies in writing the complete statement. Not to worry because we will guide you in the process. Kindly follow these four easy steps on how to create a financial statement effectively:
Step 1: Gather Your Company’s Financial Information
It is difficult to write a financial statement without gathering your company’s essential financial data and information first. From the revenue, profitability, expenses, assets, liabilities, shareholders’ equity, net income, cash balance—you name it, write them down. As we talked about income statements down to cash flow statements earlier, you already have an idea of what specific information is required to complete a financial statement. Gather as enough data as you can to process the statement smoothly afterward.
Step 2: Use Sample Financial Statement Templates
If you think processing financial statements needs you to start from the bottom, then you are wrong. You can work on premade templates from our financial statement samples instead. Such templates can guide you on how to work your financial statement easily and efficiently. Check out our sample templates from above until you can choose your preferred template to work with. And from the records and documents you gathered earlier, add them into the template to slowly complete it. Most importantly, try changing the format and design of your template to follow your preferences.
Step 3: Insert the Income Statement, Balance Sheet, and Cash Flow Statement
The main meat of your financial statement is to ensure you insert the three core statements—income statement, balance sheet, and cash flow statement. You already know how the formula works as previously discussed. But the challenge now is to organize the details. Do not just insert each statement without a sense of arrangement. Make it understandable and brief. There should be a clear division on which part is the income statement, balance, and so forth for lesser confusion. Also, an easy-to-follow structure is encouraged so that presenting the details works smoothly.
Step 4: Transform the Three Core Statements for Financial Modeling
You will slowly make a financial model in your statement for a well-explained presentation. Financial models observe trends that display the relationship of information from the three core statements. A tip is to line items for every statement and finalize a format. Use historical numbers for each lined item. You may also add additional sections for assumptions, forecasts, and supporting schedules. And they are useful for future evaluations in getting to know your latest financial health. Finally, read all your statements if they are all written well. Come up with the necessary changes if the outcome needs to be improved.
When can a financial statement be useful?
If you look back into the financial statement’s different purposes earlier, those are common examples of when the statement is needed. And a more specific example is the latest COVID-19 issue. Based on a survey, 68.9% of businesses have struggled and were affected negatively or worse due to the pandemic. A way to be updated on your company’s current financial performance and to look for ways on how to cope will be through your financial statement’s results.
What ratios are calculated in a financial statement?
A financial statement is also known for its ratio calculations. And the most common examples of what you calculate are the following:
- Inventory turnover ratio
- Price per share or earnings per share ratio (P/E ratio)
- Operating margin
- Working capital
- Debt-to-equity ratio
Are financial statements required?
According to the generally accepted accounting principles (GAAP), businesses should provide cash flow reports, profit-driven operations, and many other financial reports. The most common examples are the income statement, balance sheet, and cash flow statement. Consequently, you should prepare a financial statement since the three core statements are under the financial statement itself.
It is clear that a financial statement is one of the best tools you can use to stay on track of your company’s assets, liabilities, balance, net worth, expenses, and more. So when you notice any negative impact on your organization’s performance in financial management, do consider our collection of sample financial statement templates. Thanks to these tools, you can slowly accomplish effective financial security, which is just what every company should include in their business plan. Download now!