Financial Statements: Structures and Relationship
Though it is said organisations have an indefinite life, in reality they do have a particular life cycle. These are birth, growth, plateau and finally no growth or decline. This is not unlike a product life cycle. In periods of slow growth, product extensions are introduced to increase its life span. Similarly, companies need to make changes, adapt to new technologies and economic scenarios to survive and earn profits. Some companies are bought over, and while their names stay, the businesses change dramatically.
So Corporations that have lasted a long time (e.g. Coke, IBM, Unilever, Microsoft) have perfected to a great degree to adapt rapidly to changes in the marketplace and stay ahead in the game. Apple is an excellent example of a company that reinvented itself, introduced a slew of new products that redefined the market. It is easy for companies to get complacent and be immune to changes in the industry. Companies need to reassess their processes from time to time to stay efficient and increases profitability.
Financial reports play an important role in helping monitor an organisations health, attract investors and keep stake holders. The information needs to be accurate and relevant. Consistent practices tend to lead to accurate reports which are useful and relevant to the user. Regular cycles of these processes lead to capturing of accurate information. Say, a weekly analysis of financial reports.
In any business, transactions happen through the day. Purchases and sales of goods or services happen. The workforce produces an output. The various departments go about their business. Usually in most companies, a monthly review of performances is conducted. Income statement and cash flow statement if prepared on a monthly basis help capture those months’ transactions. A review of these reports helps analyse the transactions on a more detailed basis. The accountants with their financial expertise look at the data from different perspectives and arrive at conclusions.
One of the most important parts of accounts is capturing information. This is usually done in specific formats. For examples, all goods sold are done using an invoice. So all expenses, and sales are classified into different compartments. An organised list of the same is called a chart of accounts. So when a data is given, it is stored in that relevant compartment with a title. Then using accounting practices these compartments are arranged to produce monthly sheets, which can be analysed.
These compartments are stored in a general ledger which serves as a primary source of information for the preparation of other financial reports. Some examples of compartment names are assets, liabilities, income, and operating expenses. Further divisions in these compartments are for instance accounts payable, accrued payroll, long-term notes payable (come under assets).
So the purchase of a machine would come under assets. To balance it on the liability side they would note the loan taken to purchase the machine under liabilities.
Three key financial statements that form an important part of any annual statement are the balance sheet, income statement and statement of cash flow.
Specific and detailed reports under any heading can be made, using the primary source of data.
The primary source of data is the General Ledger. Traditionally it was a large book, now the same is maintained in a computer. The Ledger is always kept in balance, since when something is added, another is subtracted.
Customized reports are easily available quickly, thanks to the maintenance of reports in computers. A variety of reports suiting your financial assessment need can be easily generated to monitor your business.
- Finance and Accounting: The Why and What
- Financial Statements: Structures and Relationship
- Understanding Balance Sheets
- Understanding Income Statements
- Understanding Cash Flow Statement
- The Significance of Cash Flow
- Key Performance Indicators of a Business
- Cost Accounting
- Plan your Business
- Three Finance Concepts Every Manager Should Know
- Building a Marketing Budget