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Businesses, both large and small produce financial reports as a way of showing the directors, stakeholders, and customers their progress, the status quo of the firm and the position in which they are financial. Financial reports are prepared in time for issuance during a specific period of or to publish them and distribute to every stakeholder. As such, the financial report must have substantial details to make it as comprehensive as possible.
Definition of a financial report
This is a formal record of the financial activities and position of an organization, person, or other entity. It is presented in a structured style and is put in a way that is easy to fathom they include the basic financial statements that come with the management discussion and analysis. It has the following features:
- A balance sheet that reports on the company’s liabilities, assets and the owner’s equity at a specific point in time
- A statement of comprehensive income reports on the income of the company, its expenses, and profits over within a given period. If you have a profit and loss statement, you are simply providing information on the operations of the business.
- A statement of retained earnings tackles the changes in equity of the company within the stated period
- A cash flow statement gives information on the company’s cash flow activities especially the activities that touch on investment and financing.
If a large company releases the financial statement, it may be complex and might include footnotes to the financial statements as well as the management discussion and analysis. The notes describe each item on the balance sheet and expand further on the income and cash flow statement. Financial statement notes are essential and integral part if the financial report.
How to write a financial report
It is already clear that a financial report provides information on the financial health of a business or company. It includes a balance sheet, an income statement, as well as a statement of cash flows. These reports are reviewed and analyzed by financial or business managers, boards of directors, financial analysts, investors, as well as government agencies. As such, their preparation and dissemination must be timely, and it must be accurate and flawless.
Preparing a financial report may be daunting, but the accounting involved is not very difficult.
Preparations before writing the financial report
Before you can start writing your financial reports, you have to consider the following:
- Decide on the time frame
You have to know the financial period that your report is going to cover. Most of the financial reports are prepared quarterly although there are companies that demand them to be prepared monthly.
To determine the time that your financial report is supposed to cover, it is crucial to consult the governing review documents of the organization. These can be by-laws, corporate charter, or articles of incorporation. They describe the frequency of the financial reports.
You can also ask an executive within the organization about the frequency of the financial reports. If you happen to the executive of your organization, consider the time that the financial report will be useful to you and take that as your financial report date.
- Scrutinize your ledgers
Ensure that all the contents of your ledgers are updated and well recorded. Your financial report will lack usefulness if the underlying account data is not correct. For instance, you can ensure that all the payable and receivable accounts have been processed, verify that the bank’s reconciliation is full, and establish whether every inventory purchase and product sales have been recorded.
You also have to consider the liabilities of the unrecorded data with regard to the date of the release of your financial report. For instance, identify if the company has received any services that have not been invoiced. Check if there are employees whose wages are yet to be paid. All these will present accurate liabilities and have to be incorporated in the financial statements.
- Collect any missing information
If there is any information missing in your ledgers, track down any important document that you need to ensure that the financial report is accurate and complete.
Preparing the balance sheet
Consider the following steps of preparing your balance sheet:
- Setting up the balance sheet page
This shows the company’s assets, liabilities, and equity accounts. This can be common stock and additional paid-in capital for a given date. The first page of your financial report should be titled as “Balance Sheet,” followed by the name of the organization and the effective date of the balance sheet. The items on a balance sheet are reported by a specific day of the year. For instance, the balance sheet may be prepared as of August 30.
- Format your balance sheet well
Most balance sheets have their assets on the left and liabilities or equity on the right. Others may show assets on top and liabilities or equity below.
- Enumerate your assets
You have to add the title “Assets” in the first section of the balance sheet and then write the list of all the assets that the company owns. You have to start with the current assets like cash and any items that can be converted into money within one year of the date of the balance sheet. Close this section with a subtotal of the current assets.
List the non-current assets that era not in the form of cash and cannot be converted to cash in the near future. Add all the current and the non-current subtotals and title that line as “Total Assets.”
- List your liabilities
This section is labeled as “Liabilities and Equity” and should start with current liabilities due within a year followed by long-term liabilities that cannot be settled in a year. Add them together to create the “Total Liabilities.”
- Enumerate all source of equity
This will show the amount of money the company would get if all the assets were sold off and the liabilities paid off. List all the equity accounts and create the “Total Equity.”
- Add up the equity and liabilities
Sum up the total liabilities and total equity to create the “Total Liabilities and Equity.”
- Check the balance
Ensure that the figures you have calculated from the total assets and total liabilities and equity equal the figures on the balance sheet.
Preparing the income statement
- Set up the income statement page to show the amount of money the company earned and spent in a specific period. Title this page as the “Income Statement” and include the name of the company and the time that the income statement is covering.
- List all sources of revenue and the amounts that were earned. Report on each type of revenue separately and organize them in a manner that is meaningful to the organization.
- Report the costs of all the goods sold. To calculate the cost of goods adds the direct materials, direct labor, factory costs, as well as shipping or delivery expenses. From the total revenue, deduct the cost of goods sold and title this section as “Gross Profit.”
- Record the operation cost. This will incorporate all the expenses necessary for running your business.
- Incorporate retained earnings, which is the sum of all net income or net losses since the inception of the company.
Preparing a statement of cash flow
- Set up your statement of cash flow page and title it “Statement of Cash Flows.” List the company’s name and the period this statement is going to cover.
- Come up with the operating activities section that must correspond to the income statement that is already prepared. Enumerate all the operating activities of the company to arrive at the “Net Cash Provided by Operating Activities.”
- Create an investing section with a title “Cash Flows from Investing Activities.” This should tally with the balance sheet that you have prepared.
- Incorporate financing activities
This is the last section of this page and should be titled “Cash Flows from Financing Activities,” and it relates to the equity part of the balance sheet. It has to show inflows and outflows from securities and debts that are issued by the company.
- Sum up your categories
The three categories in your statement of cash flows should be labeled as the “Increase and Decrease in Cash.” You have the liberty to add the increase and decrease in cash to the cash balance at the beginning of the period. When you sum up these two numbers, they should equal the cash balance depicted on your balance sheet.
- Add any crucial notes or narrative
Every financial statement must include the “Notes to the Financial Statements.” This contains the information that pertains to the company. You have to consider the usefulness of additional information about the finances of the company. The notes can also be about the history of the company, industry information and future plans. This gives you a chance to show the investors the meaning of the report, what it shows and does not show. The investors will see the company through your eyes.