5 Types of Financial Statements You Should Know

5 Types of Financial Statements You Should Know

While analyzing financial statements, it is crucial to know the types of those financial statements. This is to obtain comprehensive insight into the company’s financial performance’s healthiness. By understanding the types of financial statements, investors are able to indicate which strategy the reporting company is pursuing. Some company focuses on revenues generation, i.e., transaction volume centric, while others might balance their financial positions to be more solvent. Here, we will discuss types of financial statements as international accounting standards, either International Accounting Standard Board (IASB) or Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), declares.

Financial Statements as per IASB

According to IASB, general-purpose financial reporting provides financial information about the reporting entity. The information is helpful for existing and potential investors, lenders, and other creditors in making decisions relating to providing resources to the entity. Those decisions involve three things. The first is the decision in buying, selling, or holding equity and debt instruments. Second, providing or settling loans and other forms of credit. Finally, exercising the voting rights, or influencing management’s actions that affect the use of the entity’s economic resources. Moreover, this objective statement implies that financial reporting should be neutral from religious, cultural, or custom-related influences.

5 Types of Financial Statements

1. Statement of Financial Position. This includes the record of total assets, equities, and liabilities. It is noteworthy that assets should be equal to equities and liabilities. In addition, the solvency (current ratio) ratios can be derived from this type of statement.

2. Statement of Profit or Loss and Other Comprehensive Income. The primary accounts that investors can highlight in this statement are total revenues and net profit. This statement also points out deductible taxes and other operating expenses, which are subtracted from total incomes. Usually, this statement depicts the efficiency ratio of the company’s performance.

3. Statements of Cash Flow reports. Although the company’s cash flow will change from time to time, this statement helps investors or analysts obtain some insight into whether the company is holding sufficient cash. It is also beneficial to note that the behavior of a company in hoarding cash tends to be in line with the economic cycle: recession, growth, or boom.

4. Statement of Changes in Equity. The company will record initial outstanding shares in this type of statement from its inception. In essence, capital shares, additional paid-in capital, and retained earnings constitute the company’s total equity. From this statement, shareholders can monitor whether the company pays out a viable number of dividends.

5. Notes to the Account. As the statements require further explanations, financial reporting will elaborate on the necessary information that should be disclosed in more detail. For example, the financial statements of the banking company will record financings and advances on the assets side. However, within the financial position statement, only accumulative numbers avail. Thus, notes elaborate on the breakdown of those financings and advances.

Financial Statements on AAOIFI standard

AAOIFI, on the basis of religious perspective, adds two unique financial statements, particularly for Islamic Financial Institutions (IFI), to the IASB (International Accounting Standards Board) financial statements structure. Thus, the component of financial statements will be as follow:

  1. Statement of Financial Position
  2. Statement of Income
  3. Statement of Cash Flow
  4. Statement of Changes in Owners’ Equity
  5. Statement of Sources and Uses of Good Faith of Qard Fund
  6. Statement of Sources and Uses of Zakah and Charity Fund
  7. Notes to the Account

The reason behind those two additional financial statement component is because Islamic financial institutions may manage an investment portfolio for the benefit of others such as Zakah and charity fund, or a Qard fund. Therefore, AAOIFI suggests to add two other components to reflects those activities.

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