Importance of Financial Statements for Best Practice
Financial statements present an overview of the financial position of a company. For compliance with standards for best practices there are four statements which are usually prepared by companies. These are listed below:
- Balance Sheet: This tells one about the status of the company bills and whether they have been paid on time. Additionally, it also tells one about the financial flexibility of the capital and cash distribution of the firm in the form of dividends. It details the company’s assets, equities and liabilities and how they are interconnected to ensure best practices.
Assets offer future economic benefits; Liabilities are obligations which can be settled using assets and Equity is best explained as residual interest which after liabilities have been deducted from the assets. Equity applies mostly to the owners of the firm. Consider the equation relating these three components of a balance sheet: Assets = Liabilities + Equity
- Income Statement: This is mainly a profit or loss statement which reflects the monthly, quarterly or annual performance. However, there are standard formats for which income statements must follow to ensure best practices. It shows information about income from continuing operations, extraordinary items, changes in accounting principle, earning from shares and other comprehensive incomes. An income statement is also used for computing profitability ratios, gross margins, operating margins and pretax margin which assist users of income statements.
- Cash flow statement: Statement of cash flow is used to ensure best practices in managing the cash. It shows the sources and the uses of the cash during a specified period of time, which usually is an accounting period. The format for cash flow statement is such that it provides information about the net flow of cash, investing activities, financing activities, net increase in cash, and the equivalents at the start of the period.
- Statement of changes in equity: These are important for best practices in reconciling various components of the balance sheet at the end of an accounting period. The format must support IAS 1.96 requirements. It must support compliance and best practices and show details on profits and losses for the accounting period.
Financial statements are a very important accounting component which must be taken seriously. It is an important tool for accounting processes for best practices in any bank and business organization.