Financial Statements: Definition, Types, Examples, and How to Prepare Them
Financial Statements: Definition, Types, Examples, and How to Prepare Them
A company may record growth in sales, yet its profits may actually decline. Conversely, a company might record a profit while experiencing cash flow pressure. To understand such conditions, looking at sales figures alone is insufficient; readers must examine financial statements.
Financial statements present information regarding a company’s financial position, performance, and cash flows. Through these reports, business owners can track business development, management can evaluate performance, and investors and creditors can obtain information to assess the company.
Therefore, financial statements are not merely documents created to meet administrative requirements. They serve as a primary source of information for understanding how a business generates revenue, utilises assets, finances business activities, and manages its liabilities.
So, what is meant by financial statements, what are the different types, and how are they prepared and read?
Definition of Financial Statements
Financial statements are the presentation of information regarding the financial position of an entity on a specific date, as well as the financial performance and cash flows over a specific period.
This distinction in timing is important. The statement of financial position shows the company’s condition on a specific date, whereas the income statement and cash flow statement show information over a period of time.
Within the framework of a complete set of financial statements based on General Accounting Standards (SAK), these include the statement of financial position, the statement of profit or loss and other comprehensive income, the statement of changes in equity, the cash flow statement, and notes to the financial statements, accompanied by comparative information and the opening statement of financial position if required.
Simply put, financial statements can be understood as a summary of business conditions in numerical form. Through these reports, readers can see whether a company is generating profit, the extent of its assets, its liabilities, its capital structure, and how cash is obtained and utilised.
Financial statements can also be prepared periodically—for example, monthly, quarterly, or annually—in accordance with business management needs and applicable reporting regulations.
Objectives of Financial Statements
The objective of financial statements is to provide information regarding the financial position and performance of an entity that is useful to users, including resource providers such as investors and creditors. Financial statements also relate to management’s accountability for the resources entrusted to them.
Knowing the Company’s Financial Position: The statement of financial position shows assets, liabilities, and equity on a specific date. With this information, a company can identify the resources it possesses and the obligations it must meet.
Assessing Company Performance: The income statement shows revenue and expenses during a period. From this report, a company can determine whether business activities have resulted in a profit or a loss.
Assisting Decision Making: Financial information can serve as a basis when a company decides to increase capital, purchase assets, expand, reduce costs, or seek funding.
Assessing the Ability to Meet Obligations: Information regarding assets, debt, and cash flows can help assess a company’s ability to pay its liabilities.
Serving as a Basis for Evaluation and Planning: By comparing financial statements across periods, a company can observe changes in revenue, costs, profit, assets, debt, and cash.
Functions and Benefits of Financial Statements
Financial statements serve different functions for each user. For business owners, financial statements help answer fundamental questions: is the business generating profit, and what is the condition of its assets and liabilities?
For management, these reports can be used to evaluate operational activities, control costs, and formulate business plans. For investors, financial statements are a key source of information to understand the performance and financial position of a company. For creditors, financial information can be used to understand the company’s condition and its ability to meet obligations.
Thus, financial statements do not merely show numbers; they help users understand how a business operates.
Accounting Standards Governing Financial Statements in Indonesia
The preparation of financial statements does not always use the same format for all entities. The accounting standards used may vary depending on the characteristics and reporting needs of an entity.
One standard designed for micro, small, and medium enterprises is SAK EMKM. Based on SAK EMKM, the minimum financial statements consist of a statement of financial position at the end of the period, a statement of profit or loss during the period, and notes to the financial statements.
Meanwhile, entities using General Accounting Standards (SAK Umum) require more extensive presentation and disclosure.
Therefore, the simple financial statement examples in this article are intended to help understand the concepts and the relationships between figures, rather than serving as a substitute for the accounting standards applicable to each entity.
Elements of Financial Statements
Before discussing the types of financial statements, readers need to understand several elements that are frequently…