What is a Financial Statements? Meaning, Types & Purpose in 2022

What is a Financial Statements? Meaning, Types & Purpose

Financial Statements Full Details: Some people may know what financial statements are as a part of the financial reporting process which is usually often carried out through the audit stage by government agencies, accountants, firms, or other institutions.

Generally, this is done to ensure accuracy and for tax, financing, or investment purposes. The purpose of financial statements is to find out the overall financial condition of the company.

So that stakeholders and other users of accounting information can evaluate and prevent it appropriately and quickly if it turns out that the financial condition of the business is experiencing problems or requires changes.

Given the importance of this, this financial report must be prepared accurately, and carefully, and required accountability that is submitted absolutely to a competent person in the field, such as an accountant.

What is Financial statement?

Actually, what are financial statements? Financial statements are defined as recording and reporting money and transactions that occur in the business that is run which is usually made in a certain period and adjusted to the needs and company policies. Financial statements can also be used to describe the company’s performance.

In general, what is a financial report is a report that contains the recording of money and transactions that occur in a business, both buying and selling transactions and other transactions that have an economic and monetary value.

The determination is determined by company policy whether it is made every month or once a year, sometimes companies also use both.

According to the Indonesian Accounting Association (IAI), financial statements are part of the financial reporting process.

Complete financial statements usually include a balance sheet, income statement, statement of changes in financial position, notes and other reports, and explanatory material that are an integral part of the financial statements.

At the end of the financial reporting period, companies are required to prepare financial reports that inform all business activities carried out, both investment and funding activities, as well as operational activities for a certain period.

In this report, investment and funding activities are reported by the company in the balance sheet and the statement of owner’s equity. Meanwhile, operational activities are reported in the income statement ( loss and income statement ).

To complete the three reports, companies need to prepare cash flow statements that contain information related to operating, investing, and financing activities using a cash basis.

Purpose of Financial Statements

The overall purpose of financial statements is to provide useful information for investors and creditors in making investment and credit decisions.

Meanwhile, specifically, the purpose of financial statements is to present the financial position, results of operations, and other changes in financial position on a mandatory basis. And by generally accepted accounting principles.

In general, the objectives of financial statements are as follows:

Providing Reliable Information

Information provided about the economic resources and obligations of the company, with the intent of:

  • Assess the company’s strengths and weaknesses
  • Shows the company’s financial and investment position
  • Assess the company’s ability to pay off its obligations
  • Demonstrate the ability of existing resources for company growth

Providing Information Source of Wealth

Provide reliable information about sources of net worth originating from business activities in search of profit. This means:

  • Provide an overview of the number of dividends expected by shareholders.
  • Demonstrate the company’s ability to pay obligations to creditors, suppliers, employees, and the
  • government, and the ability to raise funds for the benefit of company expansion.
  • Provide information to management for use in the implementation of planning and control functions.
  • Indicates the level of the company’s ability to earn long-term profits.
company Financial Statement chart flow infographic
company Financial Statement chart flow infographic.jpg

Types of Financial Statements

The process of making financial reports follows the Guidelines for Financial Accounting Standards (PSAK), which stipulates that there are five types of financial statements, namely income statements, balance sheets, changes in capital, cash flows, and notes to financial statements.

1. Income Statement

This type of financial report describes the results of the company’s operations in a certain period. In the income statement can be seen the amount of income, sources of income obtained, the number of costs, and the types incurred during a certain period.

This report is used to evaluate the performance that has been achieved by the company and provide an overview of the achievement of cash flows in the future.

The profit that has been generated will be able to reflect the level of company profitability. This can later be used as an indicator of the level of profitability, including gross margin, operating profit, profit before tax, and continuing operating profit.

2. Balance Sheet

This type of balance sheet financial statement generally shows the company’s financial position at a certain date. The financial position means the position of the number and type of activities (assets) and liabilities (liabilities and equity) of the company.

The data contained in the balance sheet is useful for:

Provides a financial database to calculate the company’s rate of return.
Evaluate the company’s capital structure, namely assessing the company’s liquidity, solvency, and financial flexibility.

3. Capital Change Report

The statement of changes in the capital is a type of financial statement that contains the amount and type of capital currently owned. The statement of changes in the capital also explains changes in capital and the reasons for their occurrence.

The statement of changes in the capital is useful for identifying the causes of changes in the company’s owner’s equity in the value of the assets that are his rights (net assets).

4. Cash Flow Statement

A cash flow statement is a type of financial report that can show the company’s cash inflows and outflows. Cash inflows are in the form of income or loans from other parties, while cash outflows are costs that have been incurred by the company in a certain period.

5. Top Note Report

This type of financial report provides information about the explanation that is considered necessary for the existing financial statements so that the cause becomes clear. This is done with the intention that reports users can clearly understand the financial data in the financial statements.

Financial Report Function

After understanding what financial statements are, their objectives, and the types of financial statements that are commonly used, what is the function of the financial statements? Is it true that his role is so important in a business?

Describing Company or Business Conditions

The first function of financial statements is to describe the condition of a company or business. From the report, you can see the company is experiencing a profit or loss.

You can also see the cash flow that went in and out went smoothly in the previous period, and so on.

As Material for Performance Evaluation, Planning, and Decisions

With the financial statements that describe the state and condition of the company, the company’s management can use these reports to evaluate performance.

The function of financial reports is also as planning material for the company’s further operational activities. For example, if the company experienced a profit in the previous period due to sales of new products that skyrocketed, then the company can plan to increase the quantity of production or expand market share.

As a Form of Corporate Responsibility

On the company’s internal side, the function of financial statements is as a form of responsibility for the financial department to the managerial and board of directors.

Meanwhile, to external parties such as shareholders who provide capital for the company, the financial statements function as a form of accountability for the management of their funds by the company.

From all the explanations about what financial statements are, you can see that financial statements do play an important role in business or company activities.

For this reason, the recording and preparation of financial reports need to be carried out correctly and accurately so that it does not affect business performance.

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