A Beginner's Guide to Understanding Financial Statements
The Lanturn Team
Last Updated on June 15, 2023
Preparing financial statements are integral to running a successful business, providing a snapshot of a company's financial performance and position. Understanding these documents can be overwhelming for those just starting out, but with the right guide, you can gain the necessary knowledge to make informed decisions.
We've written a comprehensive guide to walk you through the basics and components of financial statements — from what makes up financial statements, interpreting them, and how to use them to make crucial financial decisions.
Financial statements provide a comprehensive view of a business's financial performance and position. They are crucial for making informed business decisions and evaluating the company's financial health. In Singapore, all companies must file financial statements with
There are two different accounting standards used in Singapore for financial reporting.
In general, companies should use SFRS if they meet the criteria for public accountability and have a need to provide a complete and fair view of their financial position and performance to stakeholders. Companies that do not meet these criteria and are not required to provide a complete financial picture may use SFRS for Small Entities instead.
It is essential to consult a qualified accounting professional to determine which standard is appropriate for a particular business and to ensure that the relevant accounting standards are followed.
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Understanding financial statements allow business owners to monitor their company's financial performance, track progress, make business plans, and identify areas for improvement. It is also essential for securing loans, attracting investors, and complying with legal and regulatory requirements. But what makes up a financial statement?
Financial statements are comprised of the following:
A comprehensive income statement, also known as a profit and loss statement, is a financial report that provides a summary of a company's financial performance over a specified period of time, typically a year or a quarter. It shows the company's revenue, expenses, gains, losses, and net income.
The comprehensive income statement helps assess a company's ability to generate revenue and manage expenses and profit. It is an essential tool for investors and analysts to evaluate a company's financial performance and make informed decisions on whether they should continue investing in it or not. This statement, paired with the balance sheet and cash flow statement, provides a complete picture of a company's financial health.
The balance sheet is a snapshot of a company's financial position at a given time. It shows the company's assets, liabilities, and equity. Assets are listed in order of liquidity, with the most liquid assets listed first, and liabilities are listed in order of when they are due. The difference between assets and liabilities is equity, which represents the ownership of the company's shareholders. The balance sheet is used to assess the company's financial health and to understand its ability to pay debts and generate profits.
A cash flow statement shows the movement of cash into and out of a company over a specified period. It provides a picture of a company's cash inflows and outflows and helps to assess its ability to generate cash and manage cash resources effectively. The cash flow statement has three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
Cash flows from operating activities reflect the cash received from the company's core business operations, such as sales and the payment of expenses. Cash flows from investing activities include money received from the sale of investments or Property, Plant, and Equipment (PPE) and payments for purchasing investments or PPE. Cash flows from financing activities include cash received from issuing or repaying debt or equity and the payment of dividends to shareholders. The cash flow statement is used to assess the company's liquidity and solvency and to determine its ability to pay debts, make investments, and pay dividends.
A statement of equity changes, also known as a statement of changes in equity or a statement of stockholders' equity, provides a summary of the transactions that have affected a company's equity. It shows the company's share capital changes and retained earnings between the beginning and end of the accounting period.
The statement typically starts with the beginning balance of equity and then shows the impact of various events, such as issuing new shares, buying back shares, and paying dividends. It also includes net income or loss — the difference between the company's revenue and expenses. It helps to understand the changes in the ownership of a company over time, as well as the company's financial performance.
Notes are additional information provided along with a company's financial statements. They are used to explain important aspects of the financial statements that the company cannot fully reflect in the financial numbers themselves. For example, notes may explain the company's accounting policies, any significant transactions or events during the period, or any changes in the company's financial structure.
Comparative information refers to information provided in the financial statements that compare the current period's results with those of the previous period. It allows for the analysis of trends and changes over time. Comparative information is usually presented as a balance sheet, income statement, and cash flow statement, with figures from the previous period and the current period's figures. It helps users of financial statements to understand the company's financial performance over time.
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Interpreting and analysing financial statements can be a complex task, but it is essential for figuring out a company's financial health and potential for future growth. When done right, financial statements can provide valuable insights into a company's potential for growth and profitability.
Here are some helpful ways to use financial statements on:
1. Track Trends Over Time: By comparing financial statements from different periods, you can identify trends in a company's revenue, expenses, and overall financial performance. This information can provide valuable insight into the company's past and future performance, which can help you make predictions about future growth and profitability.
For example, suppose you've observed that a company's revenue has been growing consistently over the past few years. In that case, you can expect this trend to continue, indicating future growth and profitability. On the other hand, if a company's expenses have been increasing at a higher rate than its revenue, it may be a sign of financial stress and a potential future decline in profitability.
2. Evaluate the Competition: Financial statements provide a wealth of information about a company's financial performance, which companies can use to compare with their competitors. By comparing key
For example, if you are considering investing in a company, you can compare its liquidity ratios, such as the current ratio or quick ratio, with those of its competitors. It helps you understand the company's ability to pay its short-term obligations compared to its competitors.
3. Consider the Industry and Market Condition: When analysing financial statements, it is essential to consider the industry and market conditions in which the company operates. It is because the specific opportunities and difficulties greatly influence a company's financial performance in its market and industry. By understanding the economic and market conditions, you can gain a deeper understanding of a company's financial performance and identify potential risks and opportunities.
For example, suppose the company operates in an industry experiencing significant growth. In that case, the company could grow considerably even with relatively high debt levels or low-profit margins. On the other hand, if the company operates in an industry that is in decline, it may struggle to maintain financial stability even if it has a strong balance sheet and high-profit margins.
4. Plan for the future: Financial statements provide valuable information businesses can use to plan their next moves. By analysing the trends and performance of a company over time, businesses can decide on how to allocate resources best and plan for growth. For example, a company can use its financial statements to identify areas for cost savings, such as reducing expenses or finding more efficient ways to operate.
Additionally, they can use the financial statements to plan for future investments and growth, such as expanding into new markets or developing new products. With the information in financial statements, businesses can finalise their future plans.
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It is beneficial for businesses to understand the right Singapore Financial Reporting Standards to ensure their financial statements comply with the regulations. For business owners and entrepreneurs, understanding the basics and learning to interpret and analyse these statements are important in making informed business and investment decisions.
With the knowledge of how to use financial statements, you can make predictions about future growth and profitability, compare performance with competitors, plan for the future and determine a company's growth and profitability potential.
Small business owners in Singapore have a lot on their plates, from managing day-to-day operations to find ways to grow their businesses. Keeping accurate financial records is essential to the success of any business, but it can be a time-consuming and complex task. It is why many small business owners in Singapore choose to hire accounting and bookkeeping service providers like
As a small business owner, prioritising your company's financial health is essential. Hiring
Here are some of the key benefits of working with Lanturn:
Efficient and accurate financial reporting
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Don't let financial stress weigh you down as a small business owner. Embrace the many benefits of working with a premier accounting & booking service provider in Singapore and make the smart choice for your business today.
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