We explain what a financial statement is and the types of information it collects. Also, what are its features and various functions.
What are financial statements?
Financial statements, also known as accounting statements, financial reports or annual accounts, are a type of specialized economic report , which many institutions use to disclose their financial situation at a specific date or time.
These types of reports are particularly useful in administrative , accounting, regulatory or management tasks, as well as being of interest to shareholders, creditors, taxpayers or owners. Therefore, they are prepared following specific accounting methodologies and standard accounting standards for financial information.
In this sense , they are prepared by public accountants : those professionals in the sector who are recognized and authorized by current local legislation to carry out financial investigations and correctly prepare financial statements.
See also: Balance sheet .
Characteristics of financial statements :
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Information
The results are the count of profits and losses to date.
Although the information collected in the financial statements usually varies according to the specific legislation in the area of each country, we can list the following most common:
- Patrimonial situation. Balance or statement of the financial situation, that is, general appreciation of the finances of the organization .
- Results. Count of profits and losses to date.
- Evolution of net worth. Financial behavior regarding the total assets of the organization.
- Cash Flow. Liquidity management capacity of the organization.
- Memory. Also known as “notes to the financial statements”.
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Context
The financial statements also provide their readers with information regarding the different financial contexts in which the organization operates, such as market conditions or economic trends that are useful in forecasting and planning its future behavior.
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Understandability
Every financial statement must, despite the specificity of its approach to economic matters, be understandable and as less hermetic as possible , without evading complex issues or very specific situations. It should not be forgotten that they are communication tools above all.
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Relevance
The information displayed in the financial statement must always be relevant to the various contexts of the organization’s action, considering various possible edges, for example, the interests of investors, the strategic guidelines of the company , etc.
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Reliability
The information in a financial statement must be truthful and correct , proof of material errors and, as far as possible, must convey confidence to the readers and transparency to the interested parties, whoever they may be.
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Objectivity
The financial statements must be the product of specialized professional investigations , and not of subjective appraisals or speculations. They must be truthful and verifiable. For this they are prepared by accounting specialists.
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Chance
The financial statements must take into account their periodicity and strategic importance.
The preparation of the financial statements must obey the occasion , taking into account their periodicity, their strategic and communicative importance and the need to be able to count on them for subsequent revisions in time .
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Provisionality
Every financial statement is provisional, that is, it is an unfinished job that presents partial and up-to-date results , which are due to the need to make “cuts” in the life of the organization in order to diagnose its finances correctly.
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Completeness
The financial statements must be exhaustive, this means: they must exhaust all possible aspects of the organization and contemplate it economically as a whole.
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Legality
Legality deals with cases of illicit driving, corruption or tax evasion.
In many countries, companies are obliged to render accounts to the State through frequent financial statements, through commercial registries and other types of control institutions. In this way , changes in the organization’s patrimony can be faithfully known and possible cases of illicit management, corruption or evasion of taxes and responsibilities can be attended to.
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