Annual Financial Statements

Annual Financial Statements refer to the annual presentation of the entity's financial performance. They comprise a Balance Sheet, Statement of Profit and Loss, Statement of changes in equity, Cash flow statement, and Notes to the financial statements.

Annual Financial statements are prepared on a going concern basis unless management intends to wind up the entity's operations under the accrual basis of accounting. The fundamental purpose of financial statements is to provide information to the stakeholders useful for making economic and financial decisions about the business.

The annual financial statements refer to the comprehensive records of all the financial transactions of a business which is published every year for the purpose of providing information to the management and stakeholders. These are documents which state the financial condition and health of an enterprise, based on which stakeholders take decision related to investment.

Such consolidated annual financial statements clearly convey all business activities that the company performs during a particular year, how much has been its earning, what are the assets and liabilities that the business has at a particular date, the cash position etc. Such information helps arrive at decisions regarding profitability, solvency or overall level of resource utilization.

The financial statements reveal whether its current condition can support a steady future growth and expansion plans, whether it has the capacity to sustain strong market competition and continue providing innovative and productive solutions to the consumers which will not only benefit them but also bring a positive change in the social and economic conditions of the country.

Every company has to get their financial statements audited so that the stakeholders can get a true and fair view of all transactions. This will ensure the details revealed related to tax, income expense, profits cash flows or assets and liabilities are accurate and transparent. However, the annual financial statements template followed by profit earning enterprises are different form the non-profit ones.

The annual financial statements consist of the following five statements:

#1 - Balance Sheet

The balance sheet in consolidated annual financial statements presents the financial position of an entity at a specific point in time. Accordingly, IAS 1 "Presentation of Financial Statements" requires the presence of the following items on the face of the balance sheet as a minimum requirement:

• Assets: Including Non-Current Assets such as property, plant and equipment, intangible assets, financial assets, assets held for sale, deferred tax asset, and current assets such as inventory, receivables, cash, and cash equivalents.
• Liabilities: Including financial liabilities, deferred tax liability, and current liabilities such as trade payables and provisions.
• Equity: Including share capital, retained earnings, and minority interest.

#2 - Statement of Profit and Loss

The income statement in annual financial statements template is prepared to report the entity's financial performance during the year. The accounting could be the calendar year or fiscal year, depending upon the accounting policy followed by the entity.

The minimum items to be presented on the face of the income statement as per IAS 1 "Presentation of Financial Statements" are:

• Revenue
• OPEX
• Earnings before Interest and Taxes (EBIT)
• Finance Cost
• Share of profit or loss from the associates and joint ventures
• Tax Expenses
• Profit and loss from discontinued operations
• Net Income After Tax for the period
• Income attributable to the minority interest
• Income attributable to the equity shareholder of the entity

#3 - Cash Flow Statement

All entities that prepare their annual financial statements in line with IFRS or IAS must present the cash flow statement as part of annual financial statements. The cash flow statement reports the changes in cash and cash equivalents during the year due to operational, financing, and investing activities.

#4 - Statement of Changes in Equity

This includes the following:

• The amount of profit and loss attributable to the shareholders.
• Transactions made with equity shareholders include the issue of new shares, the amount of dividend paid, and the balance of the reserves and surplus.
• The corrections made concerning errors made in the past.
• In the case of any changes made in accounting policies, the disclosure about the effect of the change on financial statements.

#5 - Notes to Financial Statement

Notes to the financial statements are an integral part of financial statements and include:

• Specific policies are used as per GAAP/IFRS.
• Accounting estimates.
• Details of all the amounts disclosed on the face of the balance sheet and income statement.

• The following information in an audited annual financial statements shall be presented for the proper understanding of the information presented in the financial statements:
  • Name of the entity.
  • Standalone Financial Statement or Consolidated Financial Statement. If an entity has a subsidiary company or multiple subsidiaries, it is required to prepare a standalone financial statement and consolidated financial statements. Consolidated financial statements present the combined financial performance of the holding company and its subsidiaries.
  • The reporting period for which the financial statements are presented.
  • Presentation Currency.
  • The level of rounding is used to present the amount in the financial statements, e.g., in thousands or millions.
• It is important to report the previous year's balances in the annual financial statements for comparison.
• Annual Financial Statements are prepared for the accounting year. They may be equal to the calendar year, fiscal year, or any other period as per the entity's accounting policy.
• As per IFRS, all the assets and liabilities are reported at fair value.
• Financial statements should be prepared on a going concern basis. If the management is aware of any uncertainties that may cause significant doubt about the continuity of the entity, such uncertainties should be disclosed.
• Except for the cash flow statement, annual financial statements are prepared using the accrual basis of accounting.
• According to IAS 1, "Presentation of Financial Statements," If income and expense items are material, that amount should be disclosed separately. Items of material nature include:
  • Discontinuing operations.
  • Disposal of investments and non-current assets.
  • Restructuring Expenses.
  • Litigation settlements.
• Notes to the Financial Statements should present:
  • Specific accounting policies.
  • Disclosure of information required by IFRS.
  • Additional information is relevant to understanding the financial statements.
• The listed entities must publish their financial statements within the time stipulated by the land law. Also, as a part of legal compliance, entities are required to file a copy of their financial statements with the listed stock exchange.

For illustration purposes, let's take a look at the sample audited annual financial statements of Apple Inc.

#1 - Balance Sheet

#2 - Income Statement

#3 - Statement of Changes in Equity

#4 - Cash Flow Statement

Source: https://sec.report/

• • Standalone Financial Statement or Consolidated Financial Statement. If an entity has a subsidiary company or multiple subsidiaries, it is required to prepare a standalone financial statement and consolidated financial statements. Consolidated financial statements present the combined financial performance of the holding company and its subsidiaries.
  • The reporting period for which the financial statements are presented.
  • Presentation Currency.
  • The level of rounding is used to present the amount in the financial statements, e.g., in thousands or millions.

It is important to understand who prepares these statements that are such an integral part of any entity. These preparation of annual financial statements is done by qualified and professional accountants who have in depth knowledge and experience in the accounting field.

These professionals often hold certifications at the graduation or post-graduation alevels in the field of accounting, finance or taxation. They may also hold other relevant degrees along with industry experience gained during the duration of their courses. Such degrees may include cost or management accounting, public accountants or chartered accountants.

These jobholders are required to clear various levels of exams which makes them proficient in understanding the accounting jobs and complicated financial scenarios that they are presented with during preparation of annual financial statements.

Big businesses often engage very qualified accountants who are proficient in handling large volume of accounting and financial tasks at complex levels, but small organizations may engage people with lesser experience or qualification.

In order to use the statements in an optimum manner, it is important to understand how to use them and what are the possible conclusions that can be drawn from them.

Balance Sheet – This statement is used to assess the company’s operational efficiency. Each data can be used to derive conclusions regarding the liquidity position, the leverage or the risk that the entity is into, the effectiveness with which the resources and assets are being used to strengthen the operational process, etc. Various ratios can be calculated using these data to determine its revenue generating efficiency and inventory selling capacity and speed.  

Profit and loss statement – The renevue earned or the profitability levels are identified using this. Each item can be expressed as percentage to compare them with the same item of previous year to understand the changes in growth, cost, revenue, expense, profits, etc. The vertical and horizontal analysis helsp in comparing its financial performance over the financial year with its peers and also analyse and forecast the future.

Cash Flow Statement – Cash is a very important component that defines whether the business is able to meet its immediate and short-term financial obligations or not. This keeps the business running and ensures smooth working of all departments on a day-to-day basis.  This statement keeps record of cash inflow and outflow and their effects on the operations. From the cash management point of view, this statement gives an idea about the sources and uses of cash within the enterprise.  

Statement of changes in equity – This statement helps in measuring any changes in the equity position of the owners of the business related to a particular accounting period. It states the comprehensive income, any changes in accounting policies, or additional funds put into the business. It states the assets and liabilities of company owners. Notes to financial statements – Finally this statement explains the reason behind any articular financial decision, factors leading to it, how these decisions have impacted the business and the future financial picture of the company. These footnotes are used by auditors and analysts to understand the accounting practices and company’s position.

Annual Financial statements report the financial position and performance of the entity for a specified period of 12 months. Such information is used by management, investors, lenders, and creditors to analyze the entity's financial position to make important economic and financial decisions for the future growth of the entity.

This has been a guide to what are Annual Financial Statements. We explain it with examples, how to prepare, components, who prepares it & how to analyse. You may learn more about basic accounting from the following articles –

• Financial Statements Types
• Examples of Financial Statement
• Financial Statements Importance
• Limitations of Financial Statement