How to understand company reports – Part 1
All companies in Australia must report at least twice Annually – for a small business, the minimum is annually with the Financial Reports, and larger companies such as listed on stock exchanges, will also supply Director Reports on the company activities and future plans and prospects as well as an auditor report.
Financial reports or statements are crucial for tracking the financial health of a business. They are also important in setting goals, making sound business decisions and obtaining finance.
The Financial Statements represent a formal record of the financial activities of an entity. These reports quantify the financial strength, performance and liquidity of a company. Financial Statements reflect the financial effects of business transactions and events on the entity.
There are 3 key main financial reports that are supplied – Profit and Loss, Balance Sheet, Cash Flow Statement. For small business, often just the first 2 are generated.
Profit and Loss or Income Statement – reports the Income (revenue) for the period, the Cost of Sales (stock at cost before sold), where the net of these two is the Gross Profit. Then the Expenses or overheads such as rent, wages, advertising etc, and deducted from the Gross Profit, gives the Net Profit or Earnings (often also called EBIT – Earnings Before Income Tax). Read More.
Balance Sheet or Financial Position – reports the Assets and Liabilities and Equity of the company. The Assets are what is owned, such as cash, plant and equipment, debtors (clients who owe the company. The Liabilities are what the company owes to others, such as suppliers on account (creditors), loans, tax and super for employees. Assets less Liabilities gives Equity or what the business is worth. Read More.
Cash Flow Statement – the Cash Flow Statement, presents the movement in cash and bank balances over a period. The movement in cash flows is split into the following segments:
- Operating Activities: Represents the cash flow from primary/main activities of a business.
- Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories (e.g. purchase of a factory plant)
- Financing Activities: Represents cash flow generated or spent on raising and repaying share capital and debt together with the payments of interest and dividends.
Other statement reports may also be supplied with bigger companies, such as Statement of change in Equity. Read More.
Understanding financial reports
The financial reports, including the audit report, are a source of information about the company. Financial reports are used by a wide variety of people to evaluate an company’s financial position, performance and changes during the financial year. Financial Reports help to make better informed decisions in their investment with the company.
You don’t have to be an accountant to understand financial data. Take some time to look at your company’s financial statements. Start with simple questions:
||Is the company consistently profitable or does it swing between profits and losses over years?
To find out, we look at the income statements.
||Do the company’s operations generate surplus cash each year? Does the surplus cash cover the cost of renewing plant and equipment and making new investments?
We check the statement of cash flows.
||How much does the company borrow to support its operations? What percentage of the total assets of the company is made up of borrowed money?
We find answers from the balance sheet.
In the next posts we look into the detail of what each statement says and how they are constructed.
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