Financial Statements represent a formal record of the financial activities of an entity.

These are written

reports that quantify the financial strength, performance and liquidity of a company. It reflects the
financial effects of business transactions and events on the entity.

Financial statements provide a picture of the performance, financial position, and cash flows of a
business. These documents are used by the investment community, lenders, creditors, and management
to evaluate an entity.

Types of Financial Statements

Statement of Profit or Loss (Income Statement)

Income statement reports the revenues and expenses of an organization. The expenses are
grouped and classified according to the type of cost. The income statement is useful to track expenses,
especially when the information is compared to previous years. In addition, the income statement is
typically aligned with a budget to analyze what has been spent to what the spending plan is for the
period. It also reveals the financial performance of an organization for the entire reporting period. It
begins with sales, and then subtracts out all expenses incurred during the period to arrive at a net profit
or loss. An earnings per share figure may also be added if the financial statements are being issued by a
publicly-held company. This is usually considered the most important financial statement, since it
describes performance.

The income statement is important because it shows the profitability of a company during the
time interval specified in its heading. The period of time that the statement covers is chosen by the
business and will vary.

Income Statement is sometimes called the statement of financial performance because this
statement let the users to assess and measure the financial performance of entity from period to period
of the same entity or with competitors. The detail of these three main information are:

Revenues:

Revenues refer to sales of goods or services that entity generate during the specific
accounting period. Entity can use cash basis or accrual basis to recognize its revenues. In the
revenues section, you could know how much the entity made net sales for the period they are
covering.

Revenues normally reports as the summary in income statement and if you want to
check the detail, probably you need to check with the noted to the revenues that provided.

Expenses:

Expenses are operational costs that occur in the company for specific accounting period.
They are ranking from operating expenses like salary expenses, utilities, depreciation,
transportation and training expenses to tax expenses and interest expenses.

Profit or Loss:
 Profit or loss refer to the bottom line of income statement that result from deducting
expenses from revenues. If the revenues during the period are higher than expenses, then there
is profit. However, if the expenses are higher than revenues, then there will be loss. Profit or
loss for the period will forward to retain profit or loss in balance sheet and statement of change
in equity.

Statement of Financial Position (Balance Sheet)

Balance Sheet reports the assets of a company along with the ownership properties associated
with those assets. In general, an asset can be financed through debt or owned by the company.
Therefore, the total dollar amount of assets equals the total dollar amount of liabilities and owner’s
equity. In addition, the asset and liability section break out accounts based on longevity of the balances.
For instance, long-term debt is reported on a separate line than current debt. The balance sheet is most
useful in short periods of time, it is the only financial statement based on a particular moment. While
other financial statements like the income statement aggregate sales throughout a period, the balance
sheet only reflects the current balance such as how much cash is in the bank at the date of the report.
This makes the report useful for liquidity and solvency analysis. Balance sheet also shows the financial
position of a business as of the report date. The information is aggregated into the general classifications
of assets, liabilities, and equity. Line items within the asset and liability classification are presented in
their order of liquidity, so that the most liquid items are stated first. This is a key document, and so is
included in most issuances of the financial statements.

Balance sheet is important for any business along with the income statement. Balance sheet
helps business managers or owners get a handle on the financial strength and capabilities of the
business.

Assets:

Assets are resources own by entity legally and economically. For example, building, land,
cars, and money are types of assets of entity. Assets are classified into two main categories:
Current Assets and Noncurrent Assets.

Current Assets refer to short term assets including cash on hand, petty cash, raw
materials, work in progress, finish goods, prepayments, and similar kind that convert
and consume within 12 months from the reporting date.

Noncurrent assets including tangible and intangible assets that expected to

convert and consume in more than 12 months from reporting date. Those assets include
land, building, machinery, computers equipment, long term investment and similar kind
of.

Liabilities:

Liabilities are the obligation that entity owe to others person or entity. For example,
credit purchases, bank loan, interest payable, tax payables, and overdraft. The same like assets,
liabilities are classed into two types: Current Liabilities and Noncurrent liabilities. The liabilities
are the balance sheet items and they represent the amount at the end of accounting period.
 Equity:

Equities are the different between assets and liabilities. The items in equity included
share capital, retain earning, common stock, prefer sock, and accumulation of Others income.
The changed of assets and liabilities over the period will affect the net value of equity. You can
calculate the net value of equity of an entity by removing liabilities from assets.

Statement of Changes in Equity

Statements of changes in equity revolves around the ownership stake in the company. For a
small business, this statement will not reflect many changes, as there will likely be one or minimal
owners. Larger companies experience material swings in net income, dividends reported, changes in
other comprehensive income, retained earnings, and private equity issuances. Investors use this
information to see what part of the company is being financed by capital and earnings as opposed to
debt.

Statement of Change in Equity also report all the changes in equity during the reporting period.
These changes include the issuance or purchase of shares, dividends issued, and profits or losses.

Statement of Cash Flow

Statement of Cash flow reveals the cash inflows and outflows experienced by an organization
during the reporting period. These cash flows are broken down into three classifications, which are
operating activities, investing activities, and financing activities. This document can be difficult to
assemble, and so is more commonly issued only to outside parties.

Statement of Cash Flow helps companies and investors separate and observe the differences
and extent of the cash inflows and outflows.

Notes to Financial Statements

Notes to Financial Statements provide important details about the company's financial condition
not reported in the actual financial statements, for example, explanations of accounting policies or the
descriptions of fixed assets. The auditor's report presents an independent opinion on the financial
statements of the company being audited. the report is important because it ensures that the
company's financial statements are fair and have been prepared in accordance with generally accepted
accounting principles.

Notes to Financial Statements explain the irregularities, if any, in the financial statements.
Income sheet and balance sheets are also included in the notes. The notes are created separately
because they otherwise would have been very long and would have clouded the data in the financial
statements. Notes to Financial Statement is the mandatory requirement by IFRS that entity has to
prepare this statement.