LESSON 1: WHAT ARE FINANCIAL REPORTS?

Target:

At the end of the lesson, you will be able to:

 Understand what are financial reports

 Know the contents of financial report
 Know how to prepare a simple financial report

EXPLORE

Fill out the graphic organizer below by writing down what you know about Financial
Reports. You may choose to answer using the following guide questions. Compare and
discuss your answers with a partner.

Guide questions:

1. What are financial reports?

2. Why do you need to use financial reports?
3. What are the different types of financial reports?
4. How do you prepare a simple financial report?
5. Who are the targeted users of the reports?

EXAMINE

What are financial reports?

Financial reports are everywhere: a telecommunication bill is a financial report, as are

sales receipts and bank statements. In business, however, financial reporting refers to the
financial statements that make up a company’s annual reports. Compiled by accountants,
they provide investors and lenders with information to assess a company’s profitability,
and enable company managers, government, tax authorities, and other stakeholders to
evaluate the business.

Definition

Financial statements are the means by which the information accumulated and processed
in financial accounting is periodically communicated to the users.

Financial statements provide information about economic resources of the reporting entity,
claims against the entity, and changes in those resources and claims that meet the
definitions of the elements of financial statements.
Objective of financial statements

The objective of financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions.

Components of financial statements

A complete set of financial statements comprises the following components:

 Statement of financial position. Shows the entity's assets, liabilities, and equity as of
the report date. It does not show information that covers a span of time.

 Statement of income and expenses or statement of comprehensive income . Shows the

results of the entity's operations and financial activities for the reporting period. It
includes revenues, expenses, gains, and losses.

 Statement of changes in equity. Shows the change in an owner's or shareholder's

equity throughout an accounting period.

 Statement of cash flows. Shows changes in the entity's cash flows during the
reporting period.

 Notes to financial statements. Shows a summary of significant accounting policies

and other explanatory notes.

These reports are prepared in this order and are issued to the public as a full set of
statements. This means they are not only published together, but they are also designed
and intended to be read and used together. Since each statement only gives information
about specific aspects of a company’s financial position, it is important that these reports
are used together.

Users of Financial Statements

There are many users of the financial statements produced by an organization. The

following list identifies the more common users of financial statements, and the reasons
why they need this information:

 Company management. The management team needs to understand

the profitability, liquidity, and cash flows of the organization every month, so that it
can make operational and financing decisions about the business.
  Competitors. Entities competing against a business will attempt to gain access to its
financial statements, in order to evaluate its financial condition. The knowledge they
gain could alter their competitive strategies.

 Customers. When a customer is considering which supplier to select for a major

contract, it wants to review their financial statements first, in order to judge the
financial ability of a supplier to remain in business long enough to provide the goods
or services mandated in the contract.

 Employees. A company may elect to provide its financial statements to employees,

along with a detailed explanation of what the documents contain. This can be used
to increase the level of employee involvement in and understanding of the business.

 Governments. A government in whose jurisdiction a company is located will request

financial statements in order to determine whether the business paid the
appropriate amount of taxes.

 Investment analysts. Outside analysts want to see financial statements in order to

decide whether they should recommend the company's securities to their clients.

 Investors. Investors will likely require financial statements to be provided, since

they are the owners of the business, and want to understand the performance of
their investment.

 Lenders. An entity loaning money to an organization will require financial

statements in order to estimate the ability of the borrower to pay back all loaned
funds and related interest charges.

 Suppliers. Suppliers will require financial statements in order to decide whether it is

safe to extend credit to a company.

 Unions. A union needs the financial statements in order to evaluate the ability of a
business to pay compensation and benefits to the union members that it represents.

In short, there are many possible users of financial statements, all having different reasons
for wanting access to this information.

What is Financial Statement preparation?

Preparing general-purpose financial statements (including the statement of financial

position, statement of comprehensive income, statement of changes in equity, and
statement of cash flows) is the most important step in the accounting cycle because it
represents the purpose of financial accounting.
In other words, the concept financial reporting and the process of the accounting cycle are
focused on providing external users with useful information in the form of financial
statements. These statements are the end product of the accounting system in any
company. Basically, preparing these statements is what financial accounting is all about.

EQUIP

“5 Minute Finance Lesson: Financial Statement Basics”

https://www.youtube.com/watch?v=mhmaHayMha8

“Introduction to Financial Statements”

https://www.youtube.com/watch?v=4sGEtZcLdx8

“Basic Financial Statements”

https://www.youtube.com/watch?v=B7300KsDdYY

INTEGRATE

 How useful are financial statements to the company or organization?

 In your opinion, why are financial statements important to the management?

CHECK

A. Answer the following questions.

1. What is the objective of financial statement?

_____________________________________________________________________________
_____________________________________________________________________________

2. Enumerate the components of financial statements.

_____________________________________________________________________________
_____________________________________________________________________________
3. What is the most important step in the accounting cycle?
_____________________________________________________________________________
_____________________________________________________________________________
4. What part of the financial statements shows a summary of significant accounting
policies and other explanatory notes?
_____________________________________________________________________________
_____________________________________________________________________________

5. What statement shows the entity's assets, liabilities, and equity as of the report
date?
 _____________________________________________________________________________
_____________________________________________________________________________

B. True or False: Write T if you think the statement is true and F if it is false.

1. Statement of cash flow shows the change in an owner's or shareholder's equity

throughout an accounting period.
2. An entity loaning money to an organization will require financial statements in
order to estimate the ability of the borrower to pay back all loaned funds and
related interest charges.
3. Financial statements are the means by which the information accumulated and
processed in financial accounting is periodically communicated to the users.
4. There are many users of financial statements produced by an organization.
5. A government in whose jurisdiction a company is located will not request financial
statements in order to determine whether the business paid the appropriate
amount of taxes.
6. Investors will likely require financial statements to be provided, since they are the
owners of the business, and want to understand the performance of their
investment.

7. The management team does not need to understand the profitability, liquidity,

and cash flows of the organization every month, so that it can make operational and
financing decisions about the business.
8. Notes to financial statements shows changes in the entity's cash flows during the
reporting period.

9. Statement of financial position shows the entity's assets, liabilities, and equity as of
the report date. It does not show information that covers a span of time.

10. When a customer is considering which supplier to select for a major contract, it
wants to review their financial statements first, in order to judge the financial ability
of a supplier to remain in business long enough to provide the goods or services
mandated in the contract.
 11. Statement of comprehensive income shows the results of the entity's operations and
financial activities for the reporting period. It includes revenues, expenses, gains,
and losses.

12. Suppliers will not require financial statements in order to decide whether it is safe
to extend credit to a company.

13. Outside analysts want to see financial statements in order to decide whether they
should recommend the company's securities to their clients.
14. Statement of cash flows shows changes in the entity's cash flows during the
reporting period.

15. Statement of changes in equity shows a summary of significant accounting policies

and other explanatory notes.

BUILD
Research and bring to class a sample copy of financial statements. Write a brief
discussion of your insights on the financial statements.