Financial Statements: List of Types and How to Read Them

Financial accounting is intended to provide financial information on a company’s operating performance. Financial accounting is the widely accepted method of preparing financial results for external use. A public company’s income statement is an example of financial accounting. The company must follow specific guidance on what transactions to record.

Understanding the Income Statement

Moreover, these tools also help organizations manage revenue, fixed assets, accounts receivables, and accounts payables. That’s precisely why enterprises use financial accounting to record financial transactions. Regulators like the SEC, PCAOB, and IRS use company financial statements to make sure the companies are following applicable laws. The SEC and PCAOB monitor publicly traded companies to reduce fraudulent business activities; whereas, the IRS is mainly focused on tax collection and compliance. Unlike company management or internal users, external users of financial information are not directly involved in running the business or organization.

Income statement

However, nonprofit organizations do not have shareholders and do not pay out profits. As a result, they use different financial statements to report their activities, income, and expenses. Not all financial statements are created according to the same accounting rules. The rules used by U.S. companies are called Generally Accepted Accounting Principles, while the rules often used by international companies are International Financial Reporting Standards (IFRS). Additionally, U.S. government agencies use a different set of financial reporting rules. Then, we’ll do some analysis of The Garden Spot’s financial statements.

What Are the Basic Accounting Principles?

Management accounting helps different departments in an organization to work in a coordinated manner. This is because it acts as a communication link between the departments. In the example above, the consulting firm would have recorded $1,000 of consulting revenue when it received the payment. In addition, we are going through a period of change as we implement a new finance system. Verify that the check has been issued using one of the following transactions.

Managerial accountants, also known as management accountants, collect financial data, analyze it, compile it into reports and then present it to the company’s management. Unlike the previously mentioned financial statements, these reports are intended for internal use only and aren’t governed by external regulations. As mentioned earlier, the three fundamental financial statements are the balance sheet, income statement, and cash flow statements.

A company’s balance sheet provides an overview of the company’s assets, liabilities, and shareholders’ equity at a specific time and date. The date at the top of the balance sheet tells you when this snapshot was taken; this is generally the end of its annual reporting period. Critics of principles-based accounting systems say they can give companies far too much freedom and do not prescribe transparency. They believe because companies do not have to follow specific rules that have been set out, their reporting may provide an inaccurate picture of their financial health.

• This simpler method is often used by small businesses but can present an incomplete financial picture, as it excludes outstanding receivables or payables.
• The basic differences between management accounting and financial accounting are summarized below.
• It also uses double-entry accounting to record liabilities for debit incurred (but cash not paid) and assets for income earned (but money not received).
• Another technique, known as the unit of production method of depreciation, considers the actual physical usage of a fixed asset.
• Financial accountants cannot just guess numbers on the balance sheet, income statement, or cash flow statements.

Financial statements generated through financial accounting are used by many parties outside of a company, including lenders, government agencies, auditors, insurance agencies, and investors. Managerial accounting assesses financial performance and hopes to drive smarter decision-making through internal reports that analyze operations. A cash flow statement is used by management to better understand how cash is being spent and received. It extracts only items that impact cash, allowing for the clearest possible picture of how money is being used, which can be somewhat cloudy if the business is using accrual accounting.

FASB and IASB standards differ in some areas, and a movement is underway to align the standards to make accounting across borders easier in a world of increasingly global commerce. Internal auditing is when the company’s finances are audited by accountants who work for that company. It’s typically done by tax, financial or managerial accountants, depending on the audit’s purpose. Managerial accountants also analyze financial records to make predictions in various contexts such as operations, logistics and risk. The larger and more complex the business, the more likely it is to benefit from hiring a good managerial accountant.

Recommended if you’re interested in Finance

Their purpose is to provide financial accounting consistent information to investors, creditors, regulators, and tax authorities. Financial statements must conform to accounting standards and legal requirements. In the U.S., the Financial Accounting Standards Board (FASB) establishes financial accounting and reporting standards (generally accepted accounting principles, or GAAP). Publicly traded companies must also comply with the requirements of the Securities and Exchange Commission. Managers communicate the results of operations within a firm through accounting to various financial information users including investors and creditors.

As with tax accounting, financial accounting mistakes can cost you a lot of money and get you in legal trouble. It’s probably safe to say that everyone from sole proprietors to large corporations could benefit from hiring a good tax accountant. In fact, the larger the business, the more of a necessity it becomes.