The Complete Guide To Preparing Financial Statements

Operating revenue is generated from the core business activities of a company. Investors can also see how well a company’s management is controlling expenses to determine whether a company’s efforts in reducing the cost of sales might boost profits over time. Liabilities are debts you owe to other individuals, such as businesses, organizations, or agencies. Your liabilities can either be current (short-term) or noncurrent (long-term). Some examples of liabilities include accounts payable, accrued expenses, and long-term loan debt.

Monitoring the cash flow statement helps predict and prepare for issues before they worsen. Here, balances of fixed asset accounts like land, current accounts like cash, and intangible accounts like goodwill appear. After a stint in equity research, he switched to writing for B2B brands full-time. Arjun has since written for investment firms, consultants, and SaaS brands in the Accounting and Finance space.

1. After all, preparing financial statements requires knowledge of accounting concepts like double-entry accounting, accrual basis accounting, and the accounting cycle.
2. The financial statements are comprised of four basic reports, which are noted below.
3. Lastly, financial statements are only as reliable as the information fed into the reports.
4. Your balance sheet is a big indicator of your company’s current and future financial health.

International Financial Reporting Standards (IFRS)

Your SOCE starts with the opening balance in the shareholders’ equity (total of common and preferred stock) from the beginning of the period (i.e., last year’s SOCE). In double-entry accounting, all debits have corresponding credits of equal amounts. A trial balance checks if they’re equal; if the totals differ, check for arithmetic errors. The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing. Below is a portion of ExxonMobil Corporation’s income statement for fiscal year 2023, reported as of Dec. 31, 2023.

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One way of explaining the balance sheet is that it includes everything that doesn’t go on the income statement. For example, assets include cash, accounts receivable, property, equipment, office supplies and prepaid rent. Liabilities include accounts payable, notes payable, any long-term debt the business has and taxes payable. Last but not least, use all of your financial data from your other three statements to create your cash flow statement. Your cash flow statement shows you how cash has changed in your revenue, expense, asset, liability, and equity accounts during the accounting period.

General Principles and Concepts in Financial Statement Preparation

It’s the statement that lists the revenues and expenses for the business for a specific period. Revenues are listed first, and then the company’s expenses are listed and subtracted. External auditors assess whether a company’s financial statements have been prepared according to standardized accounting rules. This ensures that all companies are reporting their finances in the same way, which allows investors, lenders, and others to more easily understand their reports.

Ratio Analysis

The bottom line of your income statement will let you know whether you have a net income or loss for the period. An adverse opinion means that the financial statements are materially misstated and do not accurately represent the company’s financial position. After gathering financial data, accountants must adjust and classify transactions according to the appropriate accounting principles and standards. Other comprehensive income refers to unrealized gains and losses that don’t appear on the income statement. Large companies prepare financial statements following GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). These documents provide valuable insights into a business’s financial position to stakeholders such as investors, creditors, and employees.

The cash flow statement (CFS) shows how cash is earned and spent by a company. The cash flow statement complements the balance sheet and income statement. If they don’t, your balance sheet is unbalanced, and you need to find what’s causing the discrepancy between book value vs market value of equity your assets, liabilities, and equity. Your cash flow statement, or statement of cash flows, is all of your business’s incoming and outgoing cash. Basically, your cash flow statement shows you how much cash flows in and out of your business.