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The Content of a Company’s Financial Statements
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The basic objective of an enterprise is to earn a reasonable rate of return on the funds invested in the business.
The owner(s) need to know what the status of assets is, the extent to which those assets are financed by debt and the profit or loss situation of the business.
Businesses exist and operate through the actions of people. To fulfil the need for information about assets, liabilities and return on investments, these actions need to be expressed in monetary terms.
Accounting is the language that is used to express actions in monetary terms.
The result of this "translation process" is financial statements.
In its more basic form, financial statements consist of an income statement, which reflect profits or losses and a balance sheet, which reflects assets and the funds used to finance them.
The annual financial statements of a company consist of:
- Income statement
- Balance sheet
- Cash flow statement
- Notes
- Auditor's report
- Director's report
The auditor’s report is different for a Close Corporation and a Company. The differences are subject to the requirements of different Acts.
It is very important to read through the auditors and directors report for important information about the specific entity.
Financial statements are a statutory requirement, e.g. the Companies Act, Close Corporation Act, and Income Tax Act.
Financial statements are an indispensable management tool.
Financial statements are a specialised method of communicating the actions of an enterprise to all stakeholders, where stakeholders include owners, providers of capital, clients, suppliers, the workforce, the community, and government.
By law, financial statements are not required for one-man businesses (sole proprietors).