For businesses belonging to all sectors, developing and Financial statement presentation is crucial. This helps a business both internally and externally. Internally, brands can fathom through such specific analysis and reports about potential issues affecting their financial health and operations. Externally, flawless presentation of financial statement helps businesses to convince banks, stakeholders, and the public about their financial standing and credibility. Also, In the USA, businesses have to adhere to the GAAP protocols while preparing and presenting financial statements.
Financial statement presentation- the basics
Financial statements can be defined as formal reports meant to summarize the financial performance and health of a venture over a specified period of time. Such statements convey vital monetary information to both external and internal stakeholders and facilitate decision-making. However, the presentation of financial statement is no cakewalk for businesses and they have to comply with stringent regulatory requirements.
The 5 vital sections of Financial Statements
For accurate Financial statement presentation, it is important to be aware of the vital components of such statements. So, financial statements typically comprise 5 key components:
Income Statement –
This section is meant to report the revenue, and expenditure, along with profit/loss for a period.
Balance Sheet in Financial statement presentation–
This section shows the details of the company’s assets, liabilities, and equity in a certain period.
Cash Flow Statement –
It shows cash inflows and outflows.
Statement of Stockholders’ Equity –
Through this, the alterations in equity accounts are depicted.
Notes to Financial Statements –
Lastly, this section includes relevant and additional disclosures and details.
These vital components are bundled together in a systematic format in a Financial statement. So, each of these components has to be categorized and presented flawlessly during the presentation of financial statement.
Why businesses must pay attention to Financial statement presentation
Despite the hardships faced in preparing and presenting accurate financial statements, businesses cannot afford to shy away from this task. The benefits they get in turn, are:
Clarity on financial performance and health-
By presenting financial statements properly, businesses get clarity on various nuances of their financial activities. Also, business owners can fathom areas of profit and loss.
Compliance with specific Regulatory Requirements-
Businesses are able to comply with specific financial regulatory norms by preparing and presenting financial statements. In the USA, publicly traded companies must adhere to the GAAP protocols, for example. This also helps them avoid paying penalties for non-compliance.
Enhanced Decision-Making-
With proper, nuanced, and clear financial information made available through Financial statement presentation, businesses can make vital decisions without difficulties. Making future financial projections also becomes easier.
The key requirements for proper presentation of financial statements
For accurate Financial statement presentations, businesses must adhere to applicable accounting standards. In the USA, publicly traded companies comply with GAAP protocols. However, some of these entities, notably those operating in other continents also adhere to the IFRS protocols.
Financial statement Presentation Guidelines
The financial statements of a company must comply with certain basic requirements for accurate presentation and proper reflection of its financial position.
Faithful Representation-
Financial statements furnished by a company must depict the financial activities and health accurately, without any tampering of the data. The information included must be neutral and factual.
Relevance Financial statement presentation-
Businesses must ensure data included in financial statements are relevant. This facilitates proper decision-making.
Understandability-
The presented financial information should be easy to comprehend and analyze. This is possible when businesses include adequate disclosures and explanations of crucial financial terms in the reports.
Materiality-
It is important for businesses to include only material information in financial statements.
Comparability-
Financial statement preparation and presentation should be done in a way to let users compare shared metrics with similar reports. Then, consistent presentation and reporting ensure a fair comparison.
Accrual Basis-
Typically, financial statements are prepared on accrual basis of accounting. This denotes economic events are registered and recorded as they occur and not when cash exchange takes place. Next, this helps entities in matching revenues and expenses to corresponding fiscals.
The structure of Financial Statements for a flawless presentation
Income Statement
In the income statement section of the financial statement of a company, you can find its revenues, and expenses alongside the net income for a specific period. This can be for one or more quarters. The major components are:
Revenue-
It refers to the amount the company earned by selling its products, or services.
Operating Expenses-
These include expenses incurred in activities like administration, marketing, R&D, advertising etc.
Cost of Goods Sold- These include Direct costs related to offering products/services
Operating Income in financial statement presentation –
It refers to the revenue barring the COGS and operating expenses.
Other types of Income/Expenses-
These typically include applicable interests and taxes.
Net Income-
This is the “bottom line” loss or profit after deducting all expenses.
Balance Sheet
The balance sheet of a company is like a snapshot of its financial position for a specific time period. Then, the major components in it are:
Assets-
These denote resources with economic value that a company owns. These can be subdivided into- Intangible(Patents, trademarks, goodwill), Fixed (equipment, Property, plants) and Current Assets (inventory, Cash, accounts receivable).
Liabilities-
These signify the Debts and obligations of a company. Debt can be current such as accounts payable or Long-Term Debt.
Shareholders’ Equity-
This denotes values to be returned to shareholders post the liquidation of assets and debt clearance.
Cash Flow Statement-
The cash flow statement is meant to track the actual cash being credited and debited. This is further segregated into categories like:
Operating Activities-
Indicates Core business operations like cash paid by customers.
Investing Activities –
Indicates Investments made in securities and capital expenditures.
Financing Activities –
Denotes cash obtained from financing sources like equity issuances and loans.
Cash flow analysis helps understand if the company has enough cash generation for sustenance or not.
Statement of Stockholders’ Equity –
It summarizes any alterations in the equity accounts, over time. This statement reconciles the ending and the beginning of shareholders’ equity balances as reflected on the balance sheet. Its major components are:
Paid-in Capital-
Additional investments made by the shareholders.
Retained Earnings-
Company profits that are not paid as dividends.
Treasury Stock-
Company buying outstanding shares again.
Accumulated Other Comprehensive Income-
Specific income statement items.
What are the Disclosure Requirements in a Financial Statement?
Keeping a separate disclosure section in a financial report is crucial and it also comes in handy during the report presentation phase. Certain disclosures are necessitated by widely practiced accounting standards like the IFRS and US GAAP. These are:
- Accounting policies used
- Segment and geographical reporting
- Details on liability and equity accounts and material assets
- Commitments and contingencies
- Uncertainties and risks
Such disclosures ensure clarity on specific aspects of financial statements requiring better explanation.
Important aspects of Financial statement presentation as per US GAAP norms
According to the FASB Accounting Standards Codification- Topic 205, businesses adhering to the US GAAP standards for financial statement preparation, should include some key elements. These are:
- Segregating the balance sheet into sections like current and noncurrent assets as well as liabilities
- Presenting expenses by nature or function in the income statement
- Disclosing relevant information
- Including a statement for showing cash flows and statement of changes for the equity.
A look at the SEC Disclosure Requirements
Public companies registered in the USA also need to comply with Securities and Exchange Commission norms for disclosure in their financial statement presentation. They have to focus on the following aspects.
- Segment reporting disclosures covering geographic areas, products, services etc.
- Related party transactions.
- Disclosures of potential risk factors.
Tips to present financial statements
When presenting financial statements, focusing on the key information aspects is very important. Also, the communication has to be clear and effective.
Simplicity is necessary-
Using complex financial jargon is not required. The language has to be simple.
Visuals of Financial statement presentation-
Using visual elements like tables, charts, and graphs can help people understand financial data nuances in such statements.
The right pace-
Using a slow and clear pace to present the financial information as well as helps the audience understand it better.
Summing it up
In a nutshell, businesses need to focus on developing financial statements properly and presenting them aptly. That’s why for US–based ventures, adhering to the GAAP protocol is a must while some of them may also have to comply with IFRS. To ensure better regulatory standard compliance while developing financial statements, many US companies resort to accounting outsourcing service providers. So, Alpha Accounting is among the top players in this segment, catering to specific financial service requirements of offshore clients.
Source:
https://www.vintti.com/blog/financial-statement-presentation-structure-and-requirements/
https://www.linkedin.com/pulse/unveiling-art-financial-statement-preparation-best-practices-isuru/