2. PURPOSE?
To demonstrate how much your
business is making or not making
To deliver information to lenders and
shareholders
Assess the financial health of a
company
3. WHAT ARE THEY?
Statement of financial
position
Statement of comprehensive
income
Statement of changes in
equity
7. STATEMENT OF
COMPREHENSIVE INCOME
Single Step
Multi-Step
Net income=Total Revenues-Total Expenses
Gross Profit
Profits before
income tax expense
Other comprehensive
income
Total comprehensive
income
Accounting involves the action or process of keeping financial accounts. Through the use of financial statements, they are able to provide a snapshot of what is occurring within a business. A financial statement is a formal record of the financial activities of a business, person or other entity.
What is the purpose of a financial statement? Firstly, it demonstrates how much your business is making or not making. Depending on the type of financial statement, it can show various aspects of a business and demonstrate where profit gains or losses are incurring. Secondly, it delivers information to lenders and shareholders, along with other stakeholders. Financial statements can verify to users whether the business is investable or not and gives shareholders the option to purchase shares from the business depending on their previous profit margins. Lastly, to sum it up, it assesses the financial health of a company.
There are 3 main financial statements. The statement of financial position, or balance sheet, the statement of comprehensive income, or income sheet and the statement of changes in equity
The classified statement of financial positionsummarises a company’s assets, liabilities and equity at a given point in time. There are 3 forms or types of assets and these include current assets, which are any assets that can be converted into cash within a year. This includes things like cash or accounts receivable from customers. Non Current Assets are the resources that are used in a company’s operations for more than a year and are not intended for resale. This includes equipment and property. Lastly, intagible assets have no physical substance and include things like trademarks and copyrights. The key formula states that current assets + non current assets= total assets
Liabilities are things that a business owes. They include current liabilities, which is an obligation that is expected to be fulfilled within a year. This includes things like wages to workers or accounts payable to suppliers. Non-current liabilities are things that are not expected to be repayed within a year and are interest-bearing-for example, mortgages.
Last but not least, the last component, for this financial statement equity, includes retained earnings which involves keeping profits within the business. Contributed equity on the other hand refers to the amount of equity a company generates through the sale of shares to investors.
The income statement summaries a company’s revenues and expenses over a period of time. There are two forms of these statements-a single step and multi-step statement. A single-step statement determines net income in one step, by subtracting total expenses from total revenue. A major advantage of the single-step is its simplicity. On the other hand, the multi-step calculates income by grouping certain revenues and expenses together then calculating subtotals of income. There are 4 main subtotals, and these include gross profit, profits before income tax expense, other comprehensive income and total comprehensive income.
The last statement, the statement of changes in equity, links the income and balance sheet together by showing how profits or losses and dividends change the company’s retained earnings balance. It shows how and why each equity account in the company’s balance sheet changed through the years. It therefore focuses not only on retained eranings but also on other equity accounts.
