Financial Analysis
The fact that there are different types of financial information is due to the existence of standards that describe certain requirements for financial information. For example, reports can be prepared by national accounting standards, international and tax reporting requirements (IFRS), the management standards of a specific company, and so on. Specifically, the basic IFRS document, which prescribes the basis for financial reporting, the presentation of financial statements, and the principles of financial reporting, is the Conceptual Framework for Financial Reporting.
STRUCTURE OF THE FINANCIAL STATEMENTS OF AN ENTITY
The financial statements of a business typically include profit and loss accounts, balance sheets, retained earnings, and cash flow statements. Naturally, the composition of the financial statements of a limited liability company and the financial statements of an international company will be different. The common practice of large companies is to prepare financial statements that adhere to generally accepted accounting principles (GAAP or IFRS – International Financial Reporting Standards) to ensure the continuity of the information and provide it in an international format. Users of financial statements are public bodies, accountants, auditors, etc.
Certified Analysts rely on data from financial statements to evaluate results and predict future share price trends for a company. One of the most important sources of reliable and audited financial statements is the annual report, which contains the main financial statements of the company. The preparation of financial statements involves the preparation of three main forms of financial statements: the income statement, the balance sheet, and the statement that provides data on cash flow.
BALANCE SHEET
The preparation of financial statements usually begins with a balance sheet. Presents the sum of assets, liabilities, and equity on the balance sheet date and at the beginning of the year. The balanced equation is:
Assets = Liabilities + Equity
Short-term or current are expected to be paid within a year. Non-current liabilities will be reimbursed in a period exceeding 12 months from the date of presentation of the report.
INCOME STATEMENT
Contrary to the balance sheet, the income statement covers a time interval of one year (for annual financial statements). The income statement is a summary of income and expenses, net profit, and earnings per share. Typically two to three years of data are used for comparison.
STATEMENT OF CASH FLOWS
Due to accounting policies, net income may differ from net cash flow. For the three main sectors of activity, the probabilities reconcile the income statement with the balance sheet. These activities include exploitation, investment, and financing.
Operating activities include cash flows from normal business operations. Investing activities include cash flows from the purchase and sale of assets, such as capital equipment. Analysts can also find in this report the number of dividends paid and/or the value of the shares repurchased.
The financial information system, together with the annual financial statements, may also include interim financial statements, which are financial statements for less than one year. Quarterly interim financial statements are often published. The aim is to provide investors and other users with an update on the company’s situation.
In contrast to annual financial statements, interim financial statements are often unaudited and abbreviated. For the intermediate income statement to coincide with the amount recorded in the official income statement for the year, the accounting treatment of the interim financial statements must be consistent with the accounting treatment that will be followed in the annual financial statements.
