If you are a freelancer or you are dedicated to the management of a company you need to know what are the financial statements, from its definition to its obligatory nature and the reasons why they are obligatory whether they are basic or proforma:
Definition of what are financial statements
It is important that you know what are the financial statements because they are documents that indicate what the patrimony is and at what level the economy of a company or business is located and in the case of a professional, as a self-employed and a reflection of their patrimonial situation.
What are financial statements: mandatory?
Preparing financial statements is a legal obligation, since commercial companies must present and make them public together with a management report and a memory. However, the management report must be submitted obligatorily depending on the volume of business and the type of company.
Even in the case of freelancers, they are not required to submit it as long as it is not limited liability, although it is useful information to manage the business.
What are financial statements and what are they for?
Financial statements are useful because they serve many purposes such as:
- Know how the company’s finances are.
- They provide reliable information to be able to make a good management decision.
- They facilitate the analysis of how the company evolves from year to year.
- Show a transparent financial status of the company.
- Know the financial statements of the clients.
- Know the financial statements of the suppliers.
- They allow to make a comparison of the financial statements of the company with its competition.
- They are useful documents in the case of needing financing as documents attached to the application for it.
What are financial statements: characteristics
The financial statements will be correct and reliable if they meet certain characteristics such as:
- They must be trustworthy, neutral and prudent.
- They should be easy to read with notes in the margin or attached if necessary so that more complex topics can be understood.
- There are accounting standards that must be followed when drafting the financial statements so that this information can be compared with different organizations and periods.
What is a financial statement?
Ultimately, a financial statement is nothing other than a document in the form of a formal report where the economic activities of the company, an entity or people are recorded and recorded together with the modifications that have been submitted within a period.
In general, you are used by creditors, owners and partners to keep informed about how the company is performing in terms of its financial and economic situation.
The state usually requires it in a mandatory way, as it generally requires the following:
Cash flow
The cash flow statement provides information on the cash movements made by the company together with the income, expenses and all the funds available to the company up to that period.
Change of patrimony
The statement of change of equity provides all the details about contributions made by the partners, how the profits obtained by the company in a previous period were used and their distribution.
Balance sheet or balance sheet
It is the one that provides accurate information regarding assets, liabilities and funds of a company in the period in which the balance sheet was carried out, which is usually done once a year.
Results
The income statement provides detailed information on the profits, income and expenses including losses of the company, even if they are nominal or transitory within a given period.
What are basic financial statements?
The basic financial statements are: the income statement, the balance sheet, those of change of equity, those of cash flow and those of change of financial situation.
What are proforma financial statements?
The pro forma financial statements are information that is projected with an anticipated one-year forecast, that is, the document contains hypotheses of a future financial situation assuming the result of the operations if they were to materialize.
- Proforma financial statements are used by the owners and shareholders of a company, because they are interested in knowing the financial situation of the same projected over time. Based on this projection, the panorama on the approval of transactions is broadened.
- They are also useful for administrators because they allow you to have greater clarity to plan operations, make present and forward-looking decisions.
- Investors are interested because it allows them to study whether the company will undergo major changes and then evaluate the investment.
- Creditors are interested because they can insure their credits and by virtue of this they evaluate accepting or opposing the proposed transactions.
- Government authorities are also interested because they can evaluate the subscription or not of the company in the stock market of the stock exchange.
What are consolidated financial statements?
The consolidated financial statements are presented by companies that carry out their activity with subsidiaries that also carry out part of the same business. An example of these companies are those with subsidiaries in several countries or holding companies.
The document integrates the income statement and the consolidated balance sheet as consolidated accounts, providing reliable information regarding the operating and financial situation of the business group.
To carry out the collection of information, the financial statements of each of the companies are eliminated or merged. Although it can be a complex process, it all depends on the parent company and its proportion as the owner of the subsidiaries.
In fact, when the company has subsidiaries in other countries, when it presents the individual financial statements it does not show the information about its subsidiaries and it is for this reason the need to present the consolidated financial statements, since in its balance sheet, they will be presented as financial investments not as assets or as generated debts.