The financial statement is one of the key components of an annual report that provides a comprehensive overview of a company’s financial performance and position.
As a result, stakeholders, including investors, creditors, and regulatory bodies, need to assess the company’s health and viability based on these reports, prepared by the company’s management.
An annual report includes three financial statements: the balance sheet, the income statement, and the cash flow statement.
i. Balance Sheet:
An organization’s balance sheet, also referred to as a statement of financial position, describes its assets, liabilities, and shareholders’ equity as of the end of the fiscal year.
The balance sheet provides a snapshot of the organization’s financial condition and helps determine its solvency and liquidity. Assets = Liabilities + Shareholders’ Equity is the fundamental accounting equation.
An asset is a resource that the company owns, such as cash, receivables, inventory, property, equipment, and investments. A current asset is one that will be converted into cash within one year or a noncurrent asset is one that will be converted into cash within a year.
Among the current assets of a company are cash and cash equivalents, short-term investments, receivables, inventory, and prepaid expenses. A non-current asset is a long-term investment, property, plant, and equipment, or an intangible asset.
An organization’s liabilities include accounts payable, loans, and accrued expenses. As with assets, liabilities are classified either as current or non-current.
Current liabilities are those that are due within a year and those that are due after a year. Long-term debt, deferred tax liabilities, and other long-term liabilities are non-current liabilities.
Current liabilities include accounts payable, short-term debt, accrued expenses, and taxes payable.
c. Shareholders Equity:
An entity’s shareholders’ equity is the residual interest after deducting its liabilities from its assets. Among the components are common stock, retained earnings, and additional paid-in capital.
Common stock represents the par value of the shares issued to shareholders. The retained earnings represent the accumulated profits or losses that the company has retained, rather than distributed as dividends.
As a result of the balance sheet, stakeholders can gain insight into the company’s financial health and value.
It can be determined whether the company has a positive net worth or if it is overburdened with debt by comparing the total assets and liabilities.
Also, the composition of assets and liabilities can provide valuable information about a company’s long-term financial obligations and liquidity.