General Purpose Financial Statements – and how to use them.
Let’s talk about general purpose financial statements. Said no one!
Seriously, this is a tough subject but well worth it, especially for entrepreneurs, small business owners, startups, and even established companies.
So, stick with us.
General purpose financial statements not only help businesses to fulfil their obligations to stakeholders, such as shareholders, lenders, regulators, and investors.
They also provide stakeholders with a comprehensive and transparent view of a company’s financial position, performance, and cash flows.
This, in turn, helps them make informed decisions about investments, lending, or other business relationships.
Warning: this is going to be dry, but we promise to take it easy, especially for our newcomers.
What are general purpose financial statements?
General purpose financial statements (GPFS) are a set of financial reports that are intended to be used by a wide range of users, including investors, creditors, regulators, and management.
The most common general purpose financial statements are:
- the balance sheet
- income statement
- cash flow statement
- statement of changes in equity
These financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and are used to provide a comprehensive understanding of a company’s financial performance and position.
4 types of general purpose financial reporting
Let’s have a more detailed look at the 4 reports that make up the GPFS –
1. Balance sheet:
A balance sheet provides a snapshot of a company’s financial position at a specific point in time, by showing the company’s assets, liabilities, and equity.
A business can use its balance sheet to evaluate its financial position and make informed decisions.
For example, the balance sheet will show if your company has enough assets to cover its liabilities and its liquidity (its short-term obligations), it calculates your company’s net worth and overall financial health.
Looking at balance sheet trends can uncover where asset investment is for growth, or changes in key items, such as accounts receivable and inventory. You can also use it to negotiate favourable terms with lenders and investors.
2. Income statement:
An income statement shows a company’s revenue, expenses, and net income for a specific period, typically within a fiscal quarter or year.
A business can use its income statement to evaluate its financial performance, make informed decisions and manage its finances effectively.
Your business can use its income statement to:
- measure your profitability
- look at trends and changes in revenue and expenses
- planning and forecasting future revenue
- expenses to develop a budget for growth
It is particularly useful to identify cost-saving opportunities.
It is a good report to use to communicate to all stakeholders – shareholders, lenders, and investors. An income statement must be provided to the ATO as part of your business’ tax reporting obligations.
3. Cash flow statement:
A cash flow statement shows the inflow and outflow of cash for a specific period.
It is also used to track, evaluate and monitor a company’s liquidity, evaluate its solvency, and make informed decisions about its finances.
Your business can use its cash flow statement to monitor its cash position (the cash going into and out of the business), and its ability to meet its financial obligations. It is a good report to help you project future cash needs and find areas for improvements, such as if you need to reduce your working capital or improve collections on accounts receivable.
A strong income statement can be used to negotiate favourable terms with your lenders and investors, as it shows your company’s ability to generate cash and repay debt.
4. Statement of changes in equity:
The statement of changes in equity shows changes in a company’s equity (value) over a specific period, such as changes in retained earnings and the issuance or repurchase of shares.
A company can use its Statement of Changes in Equity (also known as a Statement of Owner’s Equity or Statement of Stockholders’ Equity) to evaluate its financial performance, understand the changes in its equity over time and decisions about its finances.
Your company can use a Statement of Changes in Equity to understand changes in ownership structure, such as the issuance or purchase of stock or the payment of dividends. It is helpful to evaluate its financial performance and determine the impact of its revenue, expenses, and other transactions on its equity.
It is a key tool for communicating your company’s financial performance to stakeholders, including shareholders, lenders, and investors and to plan for future growth.
Well done, glad you’re still with us and can see the value in these statements.
There’s still more to learn about them.
Does the ATO require GPFS?
Not all General Purpose Financial Statements need to be provided to the Australian Taxation Office (ATO).
The ATO primarily requires tax-related financial information, such as income statements, balance sheets, and tax returns, to assess the business’s tax liability and enforce tax compliance.
You will prepare your company’s GPFS for your company’s external users, to provide additional context and information for your company’s external users, such as shareholders, creditors, and investors.
What’s the difference between special purpose and general purpose financial statements
Special purpose financial statements (SPFS) and general purpose financial statements are two different types of financial statements that serve different purposes.
Special Purpose Financial Statements
SPFS are financial statements that are prepared for a specific purpose or user.
They are typically less comprehensive and less detailed than GPFS and may only include the information necessary to meet the specific requirements of the user.
For example, you may create an SPFS as part of a grant application, a loan application, or a tax return.
General Purpose Financial Statements
GPFS are financial statements that are prepared for external users, such as shareholders, lenders, regulators, and investors.
They are more comprehensive and detailed than SPFS and are intended to provide a full picture of a company’s financial position, performance, and cash flows.
GPFS are subject to more rigorous reporting standards.
What’s the Sleek Scoop on General purpose financial statements
So, now you know more about them, how can they be useful to your business?
General purpose financial statements can be useful for entrepreneurs of all types and sizes, including small business owners, startups, and established companies.
Here are some reasons why you will use GPFS:
GPFS can help you secure funding from investors, lenders, or other stakeholders. These statements provide a comprehensive and transparent view of the company’s financial position, performance, and cash flows.
GPFS can provide you with the information you need to make informed decisions about investments, financing, operations, and other business activities.
GPFS are subject to more rigorous reporting standards, which helps to ensure that they are accurate, complete, and in compliance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).
Assessment of business performance
GPFS enables you to track and assess the performance of your business over time, including revenue, expenses, and profits, which can help identify areas for improvement.
GPFS can provide you with the information you need to plan for growth and expansion, including forecasting cash flows, capital expenditures, and other critical business metrics.
Looking for a valuable tool to help you to secure funding, make informed decisions, comply with regulations, assess business performance, and plan for growth?
Sleek can help you create your GPFS as part of good corporate governance and provide valuable information to stakeholders. Call our accounting team today on +61 2 9100 0480 or schedule an appointment here at your convenience.