Financial statements explained

Users of accounting information are provided with annual and other periodic reports to help them make better decisions. One of such reports is the financial statements. The statements show the financial position, performance, and cash flows. This FS must comply with the regulations of the country a business is established.

1. What's financial statements

The financial statements of a company are the statements that explain an entity's performance, position, and cash flows in monetary terms. Businesses are not established by freewill. Money is put into it when doing so. As a result, the owners and other stakeholders involved want to know the benefit they will derive from it in money terms.

Businesses are created using the finances of owners and other interested users. Therefore, reports explaining the company performance are stated in money terms. The result provided in the report tells the users more about the entity's financial performance, position, and cash flows. Financial performance shows if the entity makes a profit or loss. Financial position tells users the state of affairs of the entity at a particular date. With this, they can tell if the company can continue operations in the coming period of time. Cash flows explains how the business manages its cash resources for the period.

In some countries, these statements may include additional disclosure such as the value added statement and a five-years financial summary. To ensure that one report appeals to every user, a multi purpose financial statement is prepared. Therefore, from one annual report all users can get information they need to make informed economic decisions.

2. Types of financial statements

There are four statements that are presented in an annual report. This includes the following:

Statement of profit or loss and other comprehensive income
Statement of financial position
Statement of changes in equity
Statement of cash flows

The above statements are presented based on the elements of financial statements. Which are income, expenses, equity, liability, and assets. Income and expenses are presented in the profit or loss statements while equity, liabilities, and assets are presented in the statement of financial position. The statement of changes in equity states out what makes equity increased or decreased. While the cash flow statement explains how the cash resources of the entity are utilized.

3. Entities that prepares financial statements

All entities in the private and public sector prepare financial statements. A sole trader and partnership that are registered as a business name prepares a report which is submitted to the corporate affairs commission. Also, companies in their various capacities are expected to file their annual report as well.

Non profit organizations and government business entities prepared their reports to a specific user group, primarily donors and government respectively. Government business entities that are established for profit purposes follow the same principles in preparing financial statements as those of the private sector. While others prepare it in a different format.

4. Financial statements regulations

In Nigeria, the international financial reporting standard (IFRS) and the company and allied matters acts (CAMA) is the primary regulation used in preparing financial statements. For government establishment, the international public sector accounting standards (IPSAS) and other legal pronouncements are required in preparing the reports.