Preparation of Financial Statements
In today's complex business environment, the need for a properly prepared set of financial statements, with consistent financial reporting standards, is stronger than ever before.
Over the years, the accounting profession has developed generally accepted accounting principles (GAAP), which provide the background for preparing and/or reviewing their clients' financial statements, to ensure they possess objective and reliable information, as free from bias and distortion as possible.
This increases the statements' relevance, reliability and comparability and improves the ability of various users of those financial statements to invest in, lend money to and generally make sound financial, investment and credit decisions about that company.
The balance sheet, for instance, provides analysts with a summary of the organization's assets, liabilities, and owner's equity.
It provides an overall picture of the organization's solvency, by summarizing the company's resources and the claims against them, as well as the owner's equity in the business.
It also provides an insight into the risk profile of a business and its financial flexibility, by providing information with which analysts can determine such ratios as return on equity and return on assets, to help them assess the company's financial health.
The income statement assesses the company's profitability, along with revenue and expense flows.
Statements which provide a breakdown of earnings per share are an integral part of this reporting process because they relate a company's income to a common denominator, which helps investors make profitability comparisons between companies with a disparate number of outstanding common shares.
The statement of changes in financial position provides information about an enterprise's operating, financing and investing activities and the effects of such activities on cash resources.
It assists readers assess the company's cash flow, and judge the company's ability to grow by generating cash from internal sources. It also assists readers of the financial statements assess an enterprise's liquidity and solvency, and evaluate whether the company is in a satisfactory position to meet its debt obligations and reinvest or distribute earnings.
If applicable, the financial statements may report segmented results from different tracts of the business, such as the results of operations from separate divisions or geographic areas. Segmented detail is necessary to provide readers with an accurate picture of key components of the company's operations.
This is particularly important in today's turbulent economy, where the rationalization and restructuring of business operations and sale or wind-up of business segments are common occurrences.
Extraordinary gains and losses, which do not represent normal business activities and are not expected to occur frequently over several years, must also be separately disclosed in the financial statements, in order to filter out information which is not relevant to business operations on an ongoing basis.
Disclosure notes also constitute an integral part of the financial statements because they provide detail about material events, such asmajor acquisitions or disposals during the year and data about related party transactions, which cannot be disclosed in a standard financial presentation format.
An event which has not yet occurred, but is expected to provide a material impairment or liability in the near future, should also be disclosed in the appendaged notes.