What is Financial Statements?

● Financial statements are written records that convey the business activities and the
financial performance of an entity.
● An essential tool for managing your firm are financial statements. They provide vital
information on the performance of your business and provide a snapshot of your
company's finances. They serve as the basis for organising your next course of
study.
● is a formal record that outlines the financial activities and health of a business or
individual. It provides a summary of financial data such as income, expenses, assets,
and liabilities, presenting a clear picture of the financial position and performance.
● “Financial statements show the sustainability of your business and allow you to make
educated financial decisions to ensure it is as successful as it can be,” says Grant
Godfrey, a Senior Account Manager at BDC.

There are four main financial statements

1. Balance Sheet
-The balance sheet acts as a company's financial compass, keeping track of its
assets, liabilities, and equity. It paints a clear picture of a company's financial position at a
specific point in time, providing insights into its resources and debts.

The balance sheet shows what the company owns and how much it owes at the end
of the period. It is based on the equation:

Assets = Liabilities + Shareholders’ Equity

2. Cash flow statements

-The cash flow statement is the company's financial weather forecast, predicting the
movement of cash in and out of the organization. It reveals how much cash the company
generates or burns through from its operations, investments, and financing activities.

The cash flow statement, sometimes called a statement of changes in financial position,
shows how money has moved through your business during the period.

Here is an example of a cash flow statement.

 3. Financial statements
- A financial statement is a formal record that outlines the financial activities and health
of a business or individual. It provides a summary of financial data such as income,
expenses, assets, and liabilities, presenting a clear picture of the financial position
and performance.

Notes to the financial statements

Notes to the financial statements disclose the assumptions made in preparing the
statements and help interpret and analyze the information. They typically explain:

 Accounting policies, judgments and estimates involved in preparing the statements

 Supplemental information about certain line items, such as:
 a breakdown of accounts payable and receivable
 a revenue breakdown by segment or region
 remaining economic life of assets
 Other important information, including:
 risks to the business, such as exchange-rate risk or concentration risk
 debt covenants
 contingent liabilities
 revenue and profit or loss of an acquired business or strategic investment
 Whether the statements were prepared on a cash or accrual basis
 Which accounting standards the company follows (e.g. International Financial
Reporting Standards or Accounting Standards for Private Enterprises)

4. Statement of retained earnings

- The statement of retained earnings shows the cumulative earnings of the business
after any dividends or distributions to shareholders. As well, this statement,
sometimes called a statement of changes in equity, also shows the change in the
 retained earnings account between the opening and closing periods on each balance
sheet.

Sample retained earnings statement:

5. Income Statement

An income statement shows the profitability of your business. It details how much
money your business earned and spent. The income statement is also sometimes
referred to as a profit-loss statement or an earnings statement.

It shows your:

 revenue from selling products or services

 expenses to generate the revenue and manage your business
 net income (or profit) that remains after your expenses

Below is an example of an income statement.

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To supplement an income statement, a business may also prepare a statement of

comprehensive income. This reports revenues and expenses that haven’t yet been
realized, such as unrealized gains or losses from:

 financial investments
 foreign currency adjustments
 pension liabilities

What are the types of financial statements?

There are four types of financial statements. Each has a different level of complexity,
validity and cost.
1. Internally prepared

Internally prepared statements are prepared by a company without involvement of an

external accounting professional. Interim financial statements are often internally
prepared.

2. Notice to reader

Notice to reader (NTR) is the most basic type of financial statement prepared by an
accountant. NTR usually relies entirely on the information provided by the company,
with little or no validation or auditing of figures by the accountant.

However, depending on the accountant, they may perform some limited tasks, such
as:
  some vetting of figures
 breaking down expenses
 ensuring that the capital cost allowance is calculated correctly
 making sure the correct amount of income tax is paid
 preparing rudimentary notes to the financial statements

It’s important to check what services are included. NTR may be suitable for smaller
or less complex companies preparing year-end financial statements.
“The validity of notice-to-reader can vary a lot depending on the accounting firm,”
Godfrey says. “Some just regurgitate the client-prepared information. Others have
the same reliability and depth as review engagement.”
3. Review engagement

Review engagement is the next step up in sophistication. This type of statement

usually involves some validation by the accountant. This could include reviewing the
company’s:

 accounting practices
 procedures for recording financial information
 management controls
 fraud management

A review engagement may be suitable for mid-sized and more complex businesses.
This type of statement may also be required by lenders, investors, other partners or
someone interested in buying the company.
4. Audited statements

Audited financial statements provide the highest level of assurance of the validity of
the information. The accountant may:

 request supporting documents

 review internal controls
 verify accuracy of numbers
 conduct on-site spot checks
 perform an audit count of inventory
 evaluate accounts receivable

“Audited statements provide validity and involve a deep dive into a company,”
Godfrey says. “The accountant makes sure the financials are accurate and correct.”

Audited statements may be suitable for larger businesses and those contemplating a
substantial loan or investment.

How are the different financial statements connected?

All four financial statements are linked. For example, net income is recorded at the
bottom of the income statement (see below). It is also found on the cash flow
statement and statement of retained earnings. After dividends are subtracted, we get
retained earnings, which are stated on the balance sheet.
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Why are financial statements important and how do I use

financial statements to build my business?
Financial statements are important for many reasons and are a key tool for building
your business.

 They’re essential for managing your business and planning its future. Financial
statements are used in strategic planning, budgeting and forecasts. You can monitor
interim and annual financial statements to see how your business is performing, spot
important trends and compare your actual finances with targets, budgets and
forecasts.

“Financial statements can provoke discussion and show if you’re on track so you can
 know early and often where to pivot and how to pivot,” Godfrey says. “If revenues are
up but profit margin is down, you may need to increase the gross profit margin. If
expenses are higher than what you budgeted, you may need to trim down on some
expenses.”
 Financial statements are used by lenders, investors and other partners to understand
a business and its health.

“We take our time going through the financials,” Godfrey says. “When we get a set in,
we don’t just forget it or look at a small piece. We look at it from front to back. We
look at every page and every line item.”
 Financial statements are used to assess annual tax filings.

Who prepares an annual financial statement?

Year-end financial statements are usually prepared by an accountant, but smaller
businesses often prepare them internally—for example, with the help of a
bookkeeper. Interim financial statements are typically prepared internally.

Why are Financial Statements important?

•Financial statements are crucial because they provide a comprehensive and standardized
overview of a company's financial performance, enabling transparency, informed decision-
making, and the assessment of its overall health and potential for growth. By analyzing
financial statements, investors can determine whether a company is a good investment
opportunity, lenders can assess its creditworthiness, and managers can identify areas for
improvement.