Financial reports are an important source of financial information and can be used to make sound business decisions. This means that every component in the Financial Statements is crucial. The Main Components of Financial Statements can be analogous to building blocks that are neatly arranged to become a complete building. These blocks represent or represent numbers, various economic resources, claims against those resources, and any transactions that can make changes in those resources and claims.
The function of financial statements is as a source of information about everything about finance, including business performance, profitability, to the financial position of a company. In a sense, the development of a business can be clearly reflected by looking at the financial statements of the business.
The function of financial statements is certainly very much related to strategic decision making in a business. Why is that? Through proper analysis of financial statements, a business will get insights that can be used to make strategic decisions. For example, if the financial statements of a company experience a positive trend when compared with the previous period, then a company can take more aggressive steps to expand business.
The following are the three main components of the Financial Statements that are crucially influential, namely the Balance Sheet, Income Statement, and Cash Flow Statement.
Balance Sheets or the Statement of Financial Position ( Balance Sheet )
Balance Sheet Reports are one of the main components of crucial Financial Statements. The Balance Sheet report illustrates the strength and financial health of a business. Technically, the Balance Sheet shows one side of the assets owned and used by the business. And on the other hand in the form of resources to fund ownership of these assets.
In other words, the balance sheet is a report about the assets, liabilities or liabilities, and capital of a business at a certain point in time. The important components of a Balance Sheet are as follows:
a. Asset
There are two types of assets, namely Tangible and Intangible. And both types of assets are controlled in the hope that it will provide some future benefits for the company or business.
Tangible Assets consist of Current Assets and Fixed Assets. Current assets consist of inventories, receivables, equipment and other short-term investments. As for fixed assets can be in the form of buildings, equipment, vehicles, and other physical resources.
Meanwhile, Intangible Assets consist of rights and other non-physical resources. Non-physical resources are one example such as Copyright, Patents, Goodwill, and others. which provides value to the business.
b. Liability or Liability
Obligations or liabilities are debts or legal obligations of a company that may arise during operational activities of the business. Typically, company obligations are settled or settled according to the applicable maturity through the transfer of economic benefits such as cash, goods or services.
Liability accounts include current debt, long-term debt, salaries, interest, customer deposits and other obligations to third parties. In terms of the maturity period, there are two types of obligations, namely Current and Long-Term Obligations.
Current liabilities can be liquidated within one year. Meanwhile, long-term liabilities tend to be settled in more than one year. Long-term liabilities can be in the form of long-term bonds issued by companies, notes payable, leases, pension obligations, and long-term product guarantees.
c. Equity
Theoretically, Equity is the available capital to be distributed to shareholders. Equity Value consists of residual assets of an entity after deducting liabilities. Therefore, from the perspective of a company’s liquidation, Equity will be considered as a residual claim for business assets available to shareholders after all liabilities have been paid.
For example, if PT Sekar Wangi has a Total Asset of Rp4,000,000 and a Total Liability of Rp1,200,000, then the Equity value of PT Sekar Wangi will be Rp2,800,000 (Rp 4,000,000 – Rp1,200,000). Technically, Equity consists of funds donated by company owners and shareholders, reserves and retained earnings after dividend payments are deducted. Therefore, the only way to increase the amount of Equity is by getting more funds from investors or by increasing company profits.
Also read: Examples of Financial Statements for More Developing Businesses
Profit & Loss or Income Statement ( Profit & Loss )
This report contains a summary of the financial performance of a business from time to time. Income Statement or Profit & Loss or Income Statement usually prepared or published every quarter or year. Components in this Report include:
a. Income
The amount of cash the company actually receives during a certain period, through the sale of goods or services, is called company revenue. Technically, the revenue from the company’s net sales is gross revenue after deducting discounts and sales returns. You could say income is the “Top Line” of the Income Statement.
b. Expenses / Costs
Outflows of money that are used to produce goods, provide services, or carry out other activities related to business operations are company expenses . Typical business expenses include wages or salaries, administrative costs, sales costs, asset depreciation costs, and interest costs paid on loans. Purchasing assets such as buildings or equipment does not include Expenditures / Costs.
Cost of Goods Sold (HPP) is also included in the Cost category in the Income Statement. COGS is the cost incurred for selling goods during the period. Components of the COGS itself include such as Import Duties, Purchase Transportation Costs, and Purchase Returns to convert inventory into inventory available for sale.
c. Benefits Outside Business Operations (Gain)
Gain is an increase in equity through peripheral or incidental transactions by companies other than Top line income or investments by owners (shareholders). This refers to any economic benefit that comes from outside the normal operational activities of a business. Usually, Gain refers to unusual and non-recurring transactions. Such transactions include profits ( Gain ) on land sales, changes in market prices for shares or grants. Items related to Gains are displayed in the Other Income or Non-Operational Income heading in the Income Statement in the Bottom Line position .
d. Losses Outside Business Operational Activities ( Loss )
Loss is a decrease in equity through peripheral or incidental transactions carried out by a company other than expenses / costs and distribution to the owner (dividend). The type of loss can be a loss from the sale of assets, impairment of assets, or losses due to lawsuits. In the Income Statement, the loss shown in post Other Fees or Costs of Downtime in position Bottom Line .
Cash flow statement
One component of this Financial Statement contains a summary of the company’s cash inflows and outflows. Cash Flow Reports can be prepared at the end of the month, quarter or year. The business liquidity position will be reflected in the Cash Flow Statement. And this report can also be used as a basis for budgeting and business planning. Components in the Cash Flow Statement include:
a. Cash Flow from Operating Activities
Business operational activities naturally touch on matters such as production, sales, product delivery, and payment collection activities from customers. Cash outflows at this post may include the purchase of raw materials, advertisements, and product shipping costs. Payments to suppliers, employees, and interest payments, depreciation and amortization are also included in cash outflows. Whereas cash inflows consist of sales of goods and services, cash receipts from royalties, insurance, asset leasing, and others.
b. Cash Flow from Investment Activities
In this post, cash inflows and outflows related to investment are such as the buying and selling of fixed assets, debt and equity instruments in the capital market, and other related items .
c. Cash Flows from Funding Activities
In this post, it will show activities that help companies increase capital and pay investor returns . Cash flow on this account consists of cash dividend payments, cash receipts from the issuance of shares or bonds, settlement of bonds, and others. Cash Flow from Funding Activities shows the financial strength of a company.
The three main components of the Financial Statements are the most essential reports and in general are often used by the public for business decisions. Although there are still two remaining components of the Financial Statements namely the Capital Change Report and Notes to Financial Statements (CALK). By understanding the three components of the Financial Statements, it is hoped that management, suppliers, creditors, and investors can implement sound business plans and follow financially viable strategies.
