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What is a Financial Statement? Meaning, Scope, and Types

If you plan to start a business in Hong Kong, you should know the different aspects of running a business. As entrepreneurs are busy managing business operations, they tend to overlook one of the most crucial elements–monitoring the business’s financial performance. 

Simply starting a business is not enough; business owners have to ensure that their business is scaling with strong financial growth. And they can do so by accurately recording and maintaining financial statements and analysing growth patterns. It is critical for business owners to understand these financial statements to make informed decisions about their businesses. 

But what is a financial statement? What is the function of financial statement? This guide will help you know everything about a financial statement and its significance for business growth. 

Overview:

What is a Financial Statement?

Multiple reports and documents form the financial statements of a business. Financial statements give a comprehensive view of a company’s financial performance during a specific period, such as a year or quarter. Consolidated financial statements highlight the company’s financial position, shortcomings, and the monetary results of essential decisions. 

Besides profits and losses, financial statements provide information on assets and liabilities, cash flow, etc. Typically, companies prepare these statements annually and comply with the HKFRS (Hong Kong Financial Reporting Standards) as laid down by the HKICPA (Hong Kong Institute of Certified Public Accountants). 

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Significance of Financial Statements

If you’re running a business in Hong Kong, you must ensure compliance with tax and other related regulations. The Hong Kong Inland Revenue Department demands that companies in Hong Kong duly file their tax returns, making it essential to record and maintain financial statements. 

Besides tax compliance, financial statements offer a myriad of benefits to entrepreneurs.

 

Evaluating Financial Health: Financial statements can help determine how well your business grows financially. You can understand if your business is making profits, losing, or breaking even.

 

Driving Informed Decisions: Financial statements form a strong base for business owners to make data-driven decision-making. Formulating business strategies without any information is like going into a gunfight empty-handed. With informed decisions, companies can plan growth strategies better and ensure long-term success. 

 

Comparing Trends: Recording and maintaining financial statements can help you compare statements over the years and check how your business is growing–and, if not, what steps you can take. 

 

Strategy and Budgeting: Data from financial statements can help you frame a goal-oriented financial strategy and propose a related budget. Financial statement analysis helps you determine where to cut down costs, how much debt you can pay, or how to increase profitability. 

 

Attract Investors: Companies can share these statements with shareholders and investors to make financial decisions. Additionally, investors demand financial statements to gauge your company’s financial health and offer investment capital. 

 

Professional financial service providers help maintain accurate records of financial statements and comply with the accounting and tax regulations of Hong Kong. 

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What Are the Types of Financial Statements?

Companies need to maintain different types of financial statements–balance sheet, income statement, cash flow statement, and earnings per share statement. Let’s dive deep into each of these statements. 

 

Balance Sheet

A balance sheet provides in-depth information about a company’s assets, liabilities, and shareholder’s equity. Assets and liabilities both include short-term and long-term. Assets in a balance sheet are valuable belongings of the company, such as equipment and machinery, property, investments, trademarks, or patents. On the other hand, liabilities are the amount the company is indebted to others, such as unpaid rent, loans from banks, tax payable, etc.

 

Shareholder’s equity is the money a company will have after clearing all liabilities and selling all assets. The amount is the company’s net value or worth and includes capital contributed and retained earnings. 

 

Income Statement

An income statement, typically known as the profit and loss statement, helps you understand how much revenue your company has earned and expenses incurred during the year. At the end of the report, the company’s income statement can determine how much profit or loss the company has gained–net profit or net loss. The income statement is critical to track financial performance over the years, based on which entrepreneurs can make necessary changes in their growth strategies. 

 

Key elements that make up an income statement are revenue, cost of goods sold, gross profit, operating expenses, operating profit, other income and expenses, and net profit/loss. 

 

Cash Flow Statement

Regarded as the most critical statement for small businesses, the statement of cash flows tells how well the company generates or manages cash. In simple terms, it highlights the inflow and outflow of cash from business operations during the tax year. The statement of cash flows is based on the balance sheet and income statement to determine how much money the company has accumulated. Positive cash flow indicates more cash inflow and negative cash flow means poor cash management, affecting business growth. 

 

The statement of cash flows is categorised into–operating activities, investing activities, and financing activities. 

 

Operating activities: The operating activities section shows cash earnings and spending related to the company’s daily operations. It includes payments to suppliers or employees, depreciation, amortisation, and other operating expenses.

 

Investing activities: This section describes how much cash the company has earned from investments. For example, if the company buys equipment, the cash flow statement will put it under investing activities as it has used cash to buy a long-term asset. Likewise, the sale of assets or investment securities is classified as cash from investing activities. 

 

Financing Activities: Cash spent or earned from financing the company’s operations are classified under financial activities. For example, paying dividends or repaying loans are cash outflows, whereas raising capital is a cash inflow. 

 

Analysing cash flow statements helps business owners determine the highest sources of cash inflow and judge how much money they have to pay for all business expenses, improving cash management. 

 

Statement of Retained Earnings

Also known as a statement of shareholders’ equity, it sheds light on the company’s retained earnings. The statement shows how much profit is retained within the business after distributing the shareholder’s equity. Typically, companies reinvest retained earnings or clear business debts. Business owners can learn how much money the company has to meet financial planning goals or require more capital investment after learning about shareholders’ equity.

 

Notes to the Financial Statements

Any assumptions made during preparing financial statements are recorded in this document. It includes accounting policies, contingent liabilities, gross profit, and which method was used for recording–cash or accrual. This document isn’t essential, but it helps to interpret information in other financial statements and leaders can know about shareholders equity.

 

All of the above statements are very important to determine your company’s financial health. Large-scale companies might need help to maintain these financial statements. With professional accounting and tax service partners like Sleek, they can ensure accurate records and analysis of data, complying throughout the year. 

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Who Prepares an Annual Financial Statement?

Small-scale companies usually prepare these annual financial statements internally, but as business operations grow, they need a full-fledged accounting team to report each statement. While the accounting team will prepare and maintain financial statements, you also need additional expertise to make accurate financial decisions based on the data from these statements, including comprehensive income and shareholders’ equity.  

That’s when a Chief Financial Officer (CFO) becomes more critical than ever. A CFO has the expert knowledge to foster decisions to help your company scale operations and grow financially. Moreover, the CFO ensures that financial data is accurately collected and strategically analyses the company’s financial standing to guide your company in the right direction.

Having a professional partner to advise you in your financial matters is crucial for business success. You can outsource your CFO services to Sleek and simplify financial management. 

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Conclusion

Financial statements are significant documents that highlight the financial health of a company. When all financial statements are combined, you better understand your company’s comprehensive income from different financial viewpoints. Reviewing and analysing financial statements like the income statement or balance sheet can help entrepreneurs make data-driven and wise decisions for their company’s long-term success. 

On the other hand, business owners can find it challenging to maintain all financial statements and be on top of all financial decisions. Sleek’s professional bookkeeping services facilitate the upkeep of accounts and the preparation of unaudited financial statements. Our expert accountants ensure your books are always up-to-date and taxes are filed on time, empowering you to focus on business growth. Talk to one of our Sleek experts today!

FAQs

Financial statements help a company determine its financial performance and standing during a period, usually a year or quarter. Financial statement examples are the income statement, balance sheet, cash flow statement, and earning per share statement.

Financial reporting demands companies to submit financial documents under specific circumstances. Financial documents might include balance sheets, margin reports, or accounts payables or receivables. On the other hand, financial statement meaning is written records that show the financial performance of entities. Companies have to submit financial statements to ensure tax compliance.

Investors or shareholders can find different financial elements in a financial statement. But, some of the common elements are assets and liabilities, revenues and expenses, net income, net equity, etc.

 

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