What is a financial statement?

Financial literacy doesn't stop on saving money and learning how to invest, you should also learn about the concepts in the world of finance. One thing you must understand is the importance of knowing the language of financial statements. For businesses, investors, and even individuals, a deep understanding of financial statements is indispensable in navigating the complex landscape of economic decisions. But what exactly is a financial statement, and why is it crucial, particularly in the Philippines?

In this blog post, we will learn the concept of financial statements, shedding light on the significance of these documents in the Philippine finance. We will explore the fundamental question – "What is financial statement?" – and understand the basics of financial statement analysis.

Types of financial statements

To answer the question "what is a financial statement?", it is a comprehensive record that outlines an entity's financial activities and position. It serves as a snapshot of the financial health of a business or individual, summarizing transactions, assets, liabilities, and equity. In the Philippines, financial statements are vital for both businesses and individuals as they provide a transparent overview of financial performance, aiding in strategic planning and decision-making. These financial statements follow generally accepted accounting principles (GAAP). GAAP is a set of standard accounting principles, standards, and procedures that are widely accepted and practiced in the preparation and presentation of financial statements.

1. Balance Sheet

So the first example of all the financial statements is the balance sheet. The balance sheet is a fundamental element of a financial statement, presenting a financial data on entity's or company's assets, liabilities, and equity at a specific point in time. To learn more about assets, liabilities, and equity, here are the things you need to learn and understand:

• Assets. These are usually categorized as current assets (expected to be converted to cash or used up within one year) and non-current assets (expected to be held for more than one year).
• Liabilities. This component represents the company's obligations or debts, including both current liabilities (due within one year) and non-current liabilities (due in more than one year). Examples of liabilities include loans, accounts payable, and bonds.
• Equity. And lastly, there is the equity or also known as shareholders' equity or net assets. Equity represents the residual interest in the company's assets after deducting liabilities. It includes items such as common stock, retained earnings, and additional paid-in capital.

For businesses in the Philippines, balance sheet reflects the organization's or company's financial standing or financial position, showcasing company assets such as cash, investments, and property, as well as liabilities like debts and obligations. For big companies, they are required to regularly prepare and disclose their financial statements, including the balance sheet, to provide transparency and useful information to stakeholders, such as investors, creditors, and regulators.

2. Income Statement

Next on the list of financial statements is the income statement. The income statement, also known as the profit and loss statement, delves into an entity's revenues, expenses, gains, and losses over a specific period. It provides a dynamic view of financial performance, helping individuals and businesses in the Philippines assess profitability and identify areas for improvement.

To understand an income statement, here's a basic structure and components you need to check:

• Revenue. This represents the total income generated by the company from its primary operations, such as sales of goods or services.
• Cost of Goods Sold (COGS). Also known as the cost of sales, this includes the direct costs associated with producing the goods or services sold by the company.
• Gross Profit. Calculated by subtracting the COGS from the revenue, gross profit represents the profit before deducting operating expenses.
• Operating Expenses. These include selling, general and administrative expenses (SG&A), research and development costs, and other operating costs necessary for the day-to-day operations of the business.
• Operating Income. Obtained by subtracting operating expenses from gross profit, this represents the profit generated from the core operations of the business.
• Net Income. The final line on the income statement, net income represents the total profit or loss for the period after accounting for all revenues, expenses, gains, and losses.

An income statement is essential for stakeholders, including investors, analysts, and creditors, as it provides insights into a company's profitability and financial performance. It helps assess the company's ability to generate profit, manage expenses, and sustain its operations. And also, income statement is necessary for the preparation of statement of comprehensive income. A statement of comprehensive income is a financial statement that provides a summary of a company's revenues, expenses, gains, and losses over a specific period of time, typically a fiscal quarter or year. This statement is also known as an income statement, profit and loss statement, or statement of operations. The primary purpose of the statement of comprehensive income is to show the profitability of a company during the specified time frame.

3. Cash Flow Statement

Next type of financial statement is a cash flow statement. Focusing on cash flows and inflows and outflows, the cash flow statement provides insights into liquidity, ensuring that businesses and individuals in the Philippines can meet short-term obligations. Cash flow statement covers operating, investing, and financing activities, offering a holistic perspective on cash management.

In the Philippines, as in many other countries, the cash flow statement is typically prepared using the indirect method. The cash flow statement is divided into three main sections:

• Operating Activities. This section includes cash transactions related to the core business operations of the company. It generally includes receipts and payments from activities such as sales, purchases, and operating expenses.
• Investing Activities. This section covers cash transactions for the purchase and sale of long-term assets, such as property, equipment, and investments. It provides insights into how the company is investing its capital for future growth.
• Financing Activities. This section details cash transactions with the company's owners and creditors. It includes activities such as issuing or repurchasing stocks, issuing or repaying debt, and paying dividends. It reflects how the company is funding its operations and whether it is relying on external financing or generating cash internally.

What is Financial Statement Analysis?

The process of financial statement analysis involves evaluating the information presented in these documents to make informed decisions. Whether you're a business owner in the Philippines assessing your company's performance or an individual planning for the future, here are some key aspects to consider:

1. Ratio Analysis

Utilizing financial ratios, such as liquidity ratios, profitability ratios, and solvency ratios, allows for a comprehensive evaluation of financial performance. In the Philippines, businesses often employ ratio analysis to benchmark against industry standards and identify areas for improvement.

2. Trend Analysis

Examining financial statements over multiple periods reveals trends that can be instrumental in forecasting future performance. In the dynamic economic landscape of the Philippines, trend analysis assists businesses and individuals in adapting to changing conditions and making proactive decisions.

In the Philippines, where economic landscapes are diverse and dynamic, financial statements serve as indispensable tools for individuals and businesses alike. By deciphering the components of financial statements and harnessing the power of financial statement analysis, one can gain a deeper understanding of their financial health, make informed decisions, and navigate the path to financial success. Whether you're a business owner, an investor, or an individual striving for financial stability, the insights derived from financial statements can pave the way for a secure and prosperous future.