5 Types of Financial Reports that Need to be Understood

5 Types of Financial Reports that Need to be Understood

Understanding various types of financial reports is an important aspect in managing the finances of a business entity. Like maps in navigation, financial reports serve as a guide for stakeholders to understand the company’s financial condition and performance.

Financial reports refer to a structured and systematic collection of information about the financial position and performance of a company during a certain period. This report is prepared based on applicable accounting principles and provides a comprehensive picture of the company’s financial condition. To understand it better, in this article, AdIns will discuss in depth the five types of financial reports and their functions.

Functions of Financial Reports for Companies

Companies can use financial reports as a powerful tool to manage finances effectively. The following are a number of general financial report functions.

1. Provide Financial Information

One of the important functions of financial reports is to provide information about the company’s financial condition. In this report, data about revenue, costs, net profit, assets, and liabilities are clearly outlined. This information is of course very important for company owners, investors and other parties interested in understanding how the company performs financially.

2. Monitor Financial Health

Financial reports function as a tool to monitor a company’s financial health. Through the results of performance trend analysis over time, management can identify potential problems and take necessary corrective actions. Not only that, this information is the basis for taking strategic steps, such as investment and funding.

3. Act as a basis for decision making

The information presented in financial reports is the basis for making strategic decisions. Company management can use financial reports to plan business strategies, evaluate department or project performance, and allocate resources efficiently.

4. Regulatory Compliance

Apart from providing financial information for making decisions, financial reports also play an important role in meeting applicable regulatory requirements. Many jurisdictions have strict rules regarding the preparation and presentation of financial statements. Therefore, you must ensure that financial reports comply with the standards set by the regulator.

5. Planning Tools

Financial reports can be an important tool in company financial planning. Through analyzing information about past financial performance and current financial situation, you can formulate a financial plan for the future. This includes creating a budget, planning investments, and setting realistic financial performance targets.

6. Accountability Tools

Lastly, financial reports function as a tool to increase company accountability. For company owners, financial reports can provide an overview of the use of resources and the results achieved to increase trust and transparency. Meanwhile, for investors, this report shows the company’s performance and prospects as material for investment consideration.

Types of Financial Reports

After knowing the function of financial reports, let’s understand more deeply about the five types of financial reports for your company.

1. Statement of Cash Flows

The cash flow report, also known as the statement of cash flows, provides an overview of the company’s cash inflow and outflow during a certain time period. The cash flow report plays a role in monitoring the company’s cash adequacy to meet its financial obligations, as well as evaluating the company’s ability to generate cash from its business operations.

To create a cash flow report, you must include several important components in it. There are several components that make up the cash flow report, namely cash flow from operating activities, cash flow from financing activities, and cash flow from investment activities.

2. Profit and Loss Report (Income Statement)

The profit and loss statement or income statement presents information about a company’s income and costs during a certain period, generally one year. The main components in the income statement include operating income, operating costs, gross profit, non-operating costs, operating profit and net profit.

An income statement is created to assist in assessing a company’s profitability and identifying factors that influence financial performance. Generally, this report also helps stakeholders to evaluate the company’s operational efficiency.

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3. Balance Sheet

The balance sheet is a summary of a company’s assets, liabilities and equity at a certain time. It provides an overview of a company’s net worth, as well as the relationship between assets and liabilities.

The function of the balance sheet report is to assist in evaluating a company’s financial stability and estimating its ability to meet financial obligations. There are several components in the balance sheet report, such as current assets, non-current assets, current liabilities, non-current liabilities and equity.

4. Statement of Changes in Equity (Statement of Changes in Equity)

The capital changes report or sometimes also called the equity report is a financial report that focuses on changes that occur in a company’s capital during a certain period, generally in one fiscal year. In other words, this report not only shows the company’s current capital amount, but also explains changes in capital from the previous period.

The capital changes report basically tracks two things, namely the source and use of the company’s capital. In more detail, this report contains information on share capital, retained earnings, other income, purchases of fixed assets, dividend payments, share buybacks and payment of expenses.

5. Notes to Financial Reports

Notes to Financial Reports (CaLK) provide additional information and explanations related to the information presented in the main financial reports. CaLK helps users of financial reports to better understand a company’s financial position, financial performance and cash flow.

There are several components of CaLK, including accounting policies, assumptions used, records of important events, changes in accounting policies, and additional explanations. Through these components, CaLK can provide extra transparency and clarity to report readers to help them make more in-depth analyses.

Read also: Examples of Cash Ration Formula Calculations for Financial Affairs

As an interesting conclusion, let’s focus on the functions of various types of financial reports. Starting from cash flow reports, profit and loss, balance sheets, changes in capital, and notes to financial reports, a number of these financial reports can help companies in making strategic decisions, as well as increasing accountability and transparency of company finances to various authorized parties.

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Types of Financial Reports, 5 Types of Financial Reports that Need to be Understood, Advance Innovations

Author :

Ad Ins

Published date :

26 April 2024