At the end of the fiscal year, it is essential to understand the financial situation of a company. This helps evaluate whether the situation is appropriate and whether the actions taken have been adequate or need to be adjusted. For this purpose, we have a tool that provides the necessary financial and economic information: the financial statement. In this article, we will explore what financial statements are, their purpose, key components, how financial and economic information is presented, and the different types of financial statements that exist.
What is a financial statement?
Financial statements are documents that reflect the economic and financial situation of a company over a specified period. They serve as an x-ray that allows stakeholders to understand the financial health of the company, facilitating strategic decision-making.
What are financial statements for?
Financial statements have multiple purposes:
Decision-Making
Financial statements provide key information for strategic and operational decision-making. By analyzing data such as income, expenses, assets, and liabilities, management can identify areas that need improvement, investment opportunities, and potential risks. For example, a company may decide to cut costs in less efficient departments or invest in areas that have proven to be profitable. Detailed cash flow information also allows the company to better plan its liquidity management, ensuring there is always enough money available to meet financial obligations.
Transparency and Credibility
Maintaining transparency and credibility with investors, creditors, and other stakeholders is crucial for any company. Detailed and accurate financial statements provide a clear view of the company’s financial situation, increasing investor and creditor confidence in the company’s management. A company that presents transparent financial reports demonstrates its commitment to honesty and ethics, which can translate into better relationships with investors and more favorable credit terms. Moreover, transparency in financial statements facilitates compliance with public disclosure regulations, potentially improving the company’s market reputation.
Performance Evaluation
Financial statements allow the evaluation of the company’s financial performance by comparing it with previous periods or with other companies in the sector. This is essential for measuring progress and determining if financial objectives are being met. For example, comparing this year’s income statement with last year’s can reveal trends in income and expenses, helping to identify areas of improvement or success. Comparing with industry competitors can also provide perspective on the company’s market position, helping to identify relative strengths and weaknesses. Continuous evaluation of financial performance is vital for sustainable growth and competitiveness.
Regulatory Compliance
Financial statements are necessary to comply with the legal and tax regulations of each country. Tax authorities require companies to submit accurate financial reports to calculate and verify taxes owed. Additionally, accounting standards such as the International Financial Reporting Standards (IFRS) or the General Accounting Plan (PGC) in Spain set specific requirements for the preparation and presentation of financial statements. Compliance with these standards not only avoids legal and fiscal penalties but also ensures the company follows best accounting practices, which can be beneficial for attracting investors and maintaining stakeholder trust.
What components are included in financial statements?
The main components of financial statements are:
Balance Sheet
The balance sheet shows the company’s assets, liabilities, and net worth at a specific point in time. This financial statement provides a snapshot of the company’s financial situation, showing what it owns (assets), what it owes (liabilities), and the residual value that belongs to the owners (net worth). Assets include items such as cash, receivables, inventories, and properties. Liabilities include short and long-term debts, such as loans and payables. Net worth reflects the owners’ investment and retained earnings. The balance sheet allows managers and analysts to assess the company’s liquidity, solvency, and financial stability, making informed decisions about investments and financing.
Income Statement
The income statement reflects the income, expenses, and profits or losses obtained during a specified period. Also known as the profit and loss statement, this report shows how the company has performed financially in terms of profitability. Income includes all sales and other revenue sources, while expenses encompass operating costs, salaries, taxes, and other outlays. The difference between income and expenses determines the net profit or loss. This financial statement is crucial for evaluating the company’s operational efficiency and its ability to generate profits, providing a basis for management decisions on costs, pricing, and growth strategies.
Cash Flow Statement
The cash flow statement presents the inflows and outflows of cash, classified into operating, investing, and financing activities. Operating activities include cash flows generated by the core business operations, such as sales and payments to suppliers. Investing activities reflect the purchase and sale of long-term assets, such as properties and equipment. Financing activities show flows related to loans, share issuance, and dividend payments. This financial statement is essential for assessing the company’s liquidity, its ability to generate cash and manage short-term obligations, and for planning future financing needs.
Statement of Changes in Equity
The statement of changes in equity details the variations in the company’s net worth over a period. This report shows how retained earnings, share issuances, dividend payments, and other movements affect the owners’ equity. It allows investors and management to see how strategic and operational decisions impact the company’s net value. For example, high dividend distributions may reduce equity, while new share issuances may increase it. This financial statement helps understand how financing and profit distribution policies influence the company’s long-term financial strength.
Notes to the Financial Statements
Notes to the financial statements provide additional information and explanations about the data presented in the other financial statements. These notes include details on accounting policies, breakdowns of specific items, contingencies, subsequent events, and any other relevant information that helps correctly interpret the financial statements. The notes are fundamental for offering a complete and transparent understanding of the company’s financial situation, explaining figures in context and revealing aspects not evident in the main financial statements. This increases the reliability and accuracy of the financial information presented, facilitating better decision-making by investors, creditors, and other interested parties.
How is financial and economic information presented in financial statements?
The presentation of information in financial statements must follow certain accounting principles and standards to ensure consistency and comparability. In Spain, companies must comply with the General Accounting Plan (PGC), which establishes the accounting standards and principles to be followed.
- Clarity: Information must be clear and understandable for users of the financial statements.
- Relevance: Must include all relevant information that may influence decision-making.
- Reliability: Information must be truthful and verifiable.
- Comparability: Allows comparison of financial statements with those of previous periods and with other companies in the sector.
Types of financial statements
There are several types of financial statements that a company can prepare, depending on its needs and legal requirements:
Proforma Financial Statements
These are projections that show how the financial statements would look under hypothetical conditions. They are essential for planning and strategic decision-making, allowing companies to model future scenarios and foresee financial impacts. For example, a company can use them to evaluate the effect of a new investment or market expansion. These projections help anticipate challenges and maximize opportunities, preparing suitable growth strategies.
Consolidated Financial Statements
Consolidated financial statements aggregate the financial information of a parent company and its subsidiaries, presenting it as a single entity. By consolidating the data, intercompany transactions are eliminated, providing a clear picture of the group’s overall financial health. These statements are crucial for investors and creditors, as they allow evaluation of the group’s performance as a whole, facilitating investment and financing decisions based on comprehensive information.
Audited Financial Statements
Audited financial statements are reviewed by external auditors to ensure their accuracy and compliance with accounting standards. External audits verify that the statements faithfully reflect the company’s financial situation and adhere to standards like IFRS or GAAP. These statements enhance the credibility and trust of investors and creditors, ensuring the transparency and integrity of the financial information presented. Additionally, they help identify potential errors or fraud, providing security in the company’s financial management.
Importance of a financial statement for international companies in Spain
For international companies operating in Spain, or planning to do so, understanding the nuances of financial statements in the Spanish context is vital. Proper preparation and presentation of these documents not only ensure compliance with local regulations but also improve transparency and trust among potential investors and local partners.
Boost your company with professional financial analysis
Financial statements are essential tools for any company, especially for those with an international presence. They provide a clear view of the company’s economic and financial situation, facilitating decision-making and compliance with legal regulations. Having professional assistance in preparing and analyzing these documents ensures accuracy, regulatory compliance, and better decision-making. At GCO, our specialized team in financial advisory in Barcelona can assist in optimizing your company’s management.
