Study notes

Introduction to Financial Statements

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Other, Pre-U

Every transaction that a business gets involved with ultimately finds its way into the accounting records and financial statements of the business.

In business there are essential two main types of financial reports (or "accounts"):

  • Financial accounting – which formally records, summarises and reports the transactions of the business
  • Management accounting – which presents and analyses financial data to help management take decisions and monitor performance

Financial accounting and accompanying financial restatements focus on reports that a business is required to produce.

The three main elements of financial accounts are:

INCOME STATEMENT

This measures the business' performance over a given period of time, usually one year. It compares the income of the business against the cost of goods or services and expenses incurred in earning that revenue.

BALANCE SHEET

This is a snapshot of the business' assets (what it owns or is owed) and its liabilities (what it owes) on a particular day - usually the last day of the financial year.

CASH FLOW STATEMENT

This shows how the business has generated and disposed of cash and liquid funds during the period under review.

If you were to look at the financial accounts of a public company you would also find other elements that provide detailed information for investors, analysts and other users of the accounts.They include:

  • Directors report: includes a review of corporate governance & directors' pay
  • Auditor's Statement: a report from the auditors with their opinion on whether the accounts show a true and fair view of the financial performance and position of the company
  • Operating and Financial Review: a detailed report on the key financial and operational performance of the latest financial review (a good place to pick up on corporate strategies and objectives, market analysis etc)
  • Notes to the Accounts: a significant amount of detailed information to support the headline numbers in the Income Statement, Balance Sheet and Cash Flow Statement
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