Understanding Different Types of Financial Reports

Understanding Different Types of Financial Reports

In general, financial reporting involves creating statements that offer a business’s financial well-being. These statements are snapshots of the business’s financial health. They show what a company owns, what it owes, its income and expenses, and its overall performance against other establishments in the same industry over a specific period of time.

There are multiple types of financial reports. Each type serves a specific purpose, which usually has a knock-on effect on another type. To understand financial reports well, you must be sure to understand the various types, most importantly, the main types.

In this piece, we will examine financial reports. We will discuss them in detail, including their purposes, formats, and key components. So, read on to the end for insights.

Five Main Types of Financial Reports

Financial reports come in different forms. Consider the following main types. 

Balance sheet

Balance sheets are financial statements showing a company’s net value at a specific time. A balance sheet details what the concerned company owns (its assets), what it owes (liabilities), and the shareholders’ investment in the company (shareholders’ equity).

The balance sheet contains:

  • Assets: These are the company’s valuable items. They are the things that a company can sell or use to make or offer services that can generate income.
  • Liabilities: These are the things the company owes others. They include current liabilities (short-term debts) and long-term liabilities.
  • Shareholders’ Equity: The shareholders’ equity section usually shows what the company owes its owners or shareholders.

Income statement

Income statements are financial reports that show a company’s performance over a specific timeframe. The statements show the company’s revenue, where it went, and what is left. More specifically, the income statement records the company’s revenue, costs and expenses that went into generating the income, and the net profit or loss the company incurred over a particular period. In a nutshell, an income statement records the company’s operations that generate or use the company’s cash and determines the company’s progression.

Income statements usually include sections for total revenue, expenses and deductions, gross profit, and net income. They include income realized through the business’s primary activities, such as selling products or providing services, and revenue generated from ancillary sources, such as interest from the company’s investment, rent, or diversification to new markets.

Cash flow statement

A cash flow statement in financial reporting summarizes the movement of money in and out of the business. The statement shows the business’s efficiency in financial management, presenting where the company generates money from and how it spends it.

Cash flow statements focus on three main areas: Operating activities, investing, and financing activities.

  • Operating activities: This section highlights expenses and gains generated through various business activities.
  • Investing activities: The investing activities category shows income and expenses the company incurred through the purchase of assets or external investments such as acquisition.
  • Financing activities: This section reflects the flow of cash into the business from sources such as banks or investors. It also includes cash paid out to investors through dividends or stock repurchases and to non-investors as loan repayments and interest payments.

Annual report contents

Unlike other financial reports that focus on a specific financial aspect, annual reports touch nearly all company areas. The reports detail the company’s operations, financial performance over the preceding year, and its future objectives and goals.

The reports usually contain:

  • The company’s general corporate information
  • Performance highlights indicate the company’s key achievements
  • Financial statements, including balance sheet, cash flow, and income statement
  • Letter from the CEO to the shareholders, which usually highlights the company’s performance
  • Company’s outlook for future years, covering the company’s plans for future growth, highlighting its strategies for growth and how it plans to implement them

Generally, a company’s annual reports offer an overview of its overall health – its current financial and performance stability and its plans for future sustainable growth.

Interpreting financial ratios

Financial ratios in financial reporting are generally analyses drawn from various financial statements and integrated reports that seek to offer insights into a company’s performance and position, profitability, liquidity, and operational efficiency. 

The ratios help compare a company’s performance over time to identify trends. They also assist in measuring a company’s market position relative to others in the same industry. Moreover, financial ratios are useful in predicting the future performance of the company in question as they help measure a company’s progression over time. And the role of technology in interpreting financial reports and accounting can not be overlooked, 

Here are some of the common financial ratios you should understand:

  • Liquidity ratios: Measure the company’s ability to consistently settle its short-term liabilities as they become due using its current assets, resources, and income.
  • Solvency ratios: Measure the company’s ability to pay its long-term liabilities and interests. They compare a company’s debts against its assets, earnings, and equity.
  • Profitability ratios: Evaluate a company’s ability to make profits from its operations.
  • Efficiency ratios: Show how well a company is utilizing its resources.

Note, however, that to effectively understand a company’s health, you should be able to interpret the various financial ratios available.

Final Words

Financial reporting is one of the most critical aspects of running a business. Reporting helps companies evaluate their financial stability, progress, and their need to balance employment and automation. These insights enable company owners, CEOs, stakeholders, and investors to make informed decisions, resulting in reduced growth and sustained growth. 

Although creating financial reports is essential, you do not have to learn how to generate financial statements for your business. You can contact an external accounting service to do it for you. All you need is to know how to read and interpret them.

Still, it is worth noting that no financial report paints the whole picture – each report focuses on a specific line. As such, you should learn and understand how to interpret them all — and most importantly, the main ones. MRINetwork can help you find the right accounting service for your company. They are experts in talent recruitment and management.