Financial Statements: List of Types and How to Read Them

Generally Accepted Accounting Principles (GAAP) are the guidelines that accountants use to determine how things are reported in the financial statements. The three main reports within the financial statements are the balance sheet, income statement, and cash flow statement. Some corporations may be required to have their external financial statements audited.

It presents the matters which have been encouraged by accounting standards for transparency purpose. We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English. The company also has to address any subsequent events that happen after what are notes to financial statements the close of the accounting period. How the company handles this type of event hinges on whether the event is a Type I or Type II event. Financial accountants use the terms footnote, note, and explanatory note pretty much interchangeably as all three terms represent the same explanatory information.

Comparative Financial Statements

The notes to the financial statements often contain information about how the accountants applied the GAAP to the financial reports of an organization. More complex financial statements prepared by big corporations may also incorporate supplementary notes and may be subject to an external independent audit to verify their accuracy and fairness of presentation. These notes provide detailed explanations of the accounts and financial information contained in the main reports outlined above. The income statement, which is sometimes called the statement of earnings or statement of operations, lists all revenue and expense account balances and shows the company’s net income or net loss for a particular period of time. Then, total expenses are subtracted from total revenues to determine the net income or loss. Annual reports often incorporate editorial and storytelling in the form of images, infographics, and a letter from the CEO to describe corporate activities, benchmarks, and achievements.

While accountants and finance specialists are trained to read and understand these documents, many business professionals are not. An ability to understand the financial health of a company is one of the most vital skills for aspiring https://www.bookstime.com/ investors, entrepreneurs, and managers to develop. Armed with this knowledge, investors can better identify promising opportunities while avoiding undue risk, and professionals of all levels can make more strategic business decisions.

How Do I Prepare a Financial Statement Compilation?

Rather than setting out separate requirements for presentation of the statement of cash flows, IAS 1.111 refers to IAS 7 Statement of Cash Flows. Both an annual and 10-K report can help you understand the financial health, status, and goals of a company. While the annual report offers something of a narrative element, including management’s vision for the company, the 10-K report reinforces and expands upon that narrative with more detail. 10-K reports are organized per SEC guidelines and include full descriptions of a company’s fiscal activity, corporate agreements, risks, opportunities, current operations, executive compensation, and market activity. You can also find detailed discussions of operations for the year, and a full analysis of the industry and marketplace. While cash flow refers to the cash that’s flowing into and out of a company, profit refers to what remains after all of a company’s expenses have been deducted from its revenues.

• IAS 1 was reissued in September 2007 and applies to annual periods beginning on or after 1 January 2009.
• Accounting policies and notes also help the business to comply with the accounting standards and regulations, and to avoid errors, misstatements, and disputes.
• Use the formatting provided (including the note number/topic sequence) as these schedules are critical to consolidating the notes to the statewide financial statements.
• They help the users of the financial statements to understand the basis and rationale behind the reported figures, and to compare them with other businesses and periods.
• Notes to the accounts should be clear, concise, and informative, and they should follow a logical order and structure.

They provide information about the methods, assumptions, and judgments used to prepare the financial statements, as well as additional details and explanations that are not included in the main figures. In this article, you will learn about the importance and benefits of disclosing notes to the final accounts, and how to write them effectively. Footnotes also depend heavily on the accounting framework that is being followed for the specific company. For example, the financial statement footnotes will look different for a company that follows IFRS standards compared to US GAAP. Publicly held companies will require even more extensive financial statements and footnotes mandated by authorities like the Securities and Exchange Commission (SEC) in the United States. Auditors will also use the financial statements and their footnotes to help understand the company’s financial position.

Notes that show the basis for presentation

A contingent liability exists when an existing circumstance may cause a loss in the future, depending on other events that have not yet happened and, indeed, may never happen. Recently there has been a push towards standardizing accounting rules made by the International Accounting Standards Board (IASB). IASB develops International Financial Reporting Standards that have been adopted by Australia, Canada and the European Union (for publicly quoted companies only), are under consideration in South Africa and other countries. The United States Financial Accounting Standards Board has made a commitment to converge the U.S. For example, some investors might want stock repurchases while other investors might prefer to see that money invested in long-term assets.

Reported assets, liabilities, equity, income and expenses are directly related to an organization’s financial position. Financial statement notes include elements such as accounting notes that detail how decisions were made by accountants at an organization, and an explanation of why certain items were included in different portions of the financial statements. The notes will also contain details about how inventory was valued for organizations that hold significant stocks of products in inventory. Ideally, cash from operating income should routinely exceed net income, because a positive cash flow speaks to a company’s financial stability and ability to grow its operations.

Inclusion in annual reports

Examples can include unexpected changes from the previous year, required disclosures, adjusted figures, accounting policy, etc. Footnotes may also contain notable future activities that are expected to have a significant impact on the company’s future. In the practical field, an accountant presents the explanations and analysis of financial statements through notes. The notes are presented in such a way that the matters relating to financial statements are easily understandable in comparison with those of other companies. Descriptions of upcoming new product releases or a potential product recall; in international accounting standard – 1, it is stated that a detailed explanation of each item of accounts of the financial statements is to be stated. The following list touches upon the more common footnotes, and is by no means comprehensive.