Knowing how to read and understand the numbers in a company's financial statements is an essential skill for business managers. The diversity of financial statements requires us to first familiarize ourselves with some of their characteristics before focusing on specific indicators.
In this article, we will show you what financial reports provide and how to use them to your advantage.
Understanding Financial Statements Correctly
Financial statements are defined as the economic and financial information system of an accounting entity (enterprise, organization), presented according to the forms prescribed in accounting standards and accounting regulations.
The financial report set includes four reports, which are:
- Income Statement (also known as Profit and Loss Statement)
- Balance sheet,
- Cash flow statement
- Notes to financial statements
1. Business Performance Report
Report on business results reflecting the situation , and business performance results of the business.
A company's business results are reflected in three groups of activities that generate profit or loss, which include:
- Results from core business operations = Revenue from sales and services – Revenue deductions (including discounts, sales rebates, and returned goods) – Cost of goods sold – Selling expenses – Administrative expenses
- Results from financial activities = Financial operating revenue – Financial expenses
- Results from other business activities = Other income – Other expenses
Corporate income tax is calculated based on profits reported in the business's income statement.
2. Balance Sheet
The balance sheet is a consolidated financial statement. reflection overall value existing assets , and the source of that asset of the business at a given time.
The figures on the balance sheet show the total value of a company's existing assets, broken down by asset structure and the structure of the capital sources that formed those assets.
Based on the balance sheet, it is possible to make general observations and assessments of the company's financial situation.
3. Cash Flow Statement
The cash flow statement is a report designed to track cash inflows and outflows related to three types of business activities: operating activities, investing activities, and financing activities.
3.1. Cash flow from operating activities
Cash flow from operating activities reflects the cash inflows and outflows related to production and business operations during the period, including:
- Revenue from sales, provision of services, and other income.
- Payments to suppliers of goods and services.
- Payments for employees
- Interest paid on loan
- Corporate income tax already paid
- Other income from business operations (Compensation, fines, bonuses, subsidies, etc.; Deposits received; Recovery of funds deposited as collateral)
3.2. Cash flow from investing activities
Cash flow from investing activities shows the cash inflows and outflows from the following activities:
- Cash disbursed for the purchase and construction of fixed assets / Cash received from the disposal and sale of fixed assets
- Cash disbursed for loans to other entities / Cash recovered from loans to other entities
- Cash disbursed for investment/capital contribution to other entities / Cash recovered from investment in other entities
- Interest income from loans, dividends, and profit sharing.
3.3. Cash flow from financing activities
Cash flow from financing activities shows the inflows and outflows of cash from the following financing activities:
- Receiving capital contributions, returning capital contributions, issuing shares, repurchasing shares.
- Money received from borrowing and repaying loans.
- Profit sharing, dividend payment.
Thus, through the Cash Flow Statement, the board of directors monitors cash inflows and outflows related to the three types of business activities: Operating activities, Investing activities, and Financing activities, thereby enabling them to make accurate financial management decisions.
4. Notes to the Financial Statements
The explanatory notes to the financial statements are documents used to provide a narrative description or detailed analysis of the information and data presented in the Balance Sheet, Income Statement, and Cash Flow Statement.
Thus, the Board of Directors can find out the necessary details through the Notes to the Financial Statements.
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Things to note when reading financial statements.
1. Financial Information: Art, Not Science
The presentation of a company's financial situation, as shown in financial statements, is influenced by several factors. estimation and judgment For the Board of Directors, it's not simply a matter of adding or subtracting absolute numbers.
2. Assessing the financial situation: More than just numbers.
Absolute figures in financial reports need to be considered in relation to the industry, company size, and stage of development when assessing a business's financial health. Performance indicators must be reviewed over a sufficient period to identify trends.
3. Financial statements do not show certain non-financial information.
Non-financial information such as information about the state of the economy, industry, level of competition, market forces, technological changes, management quality, and workforce are not directly reflected in a company's financial statements.
In summary...
Financial statements are the primary documents that enable managers to understand the overall financial situation of a business. A thorough understanding of the financial information presented in these statements helps managers control the financial situation, make appropriate management decisions, and prevent risks arising from poor financial management.