Cash in. Cash out. What’s the balance? Where did the money go? Do we have the money to invest in something new?
These are all inquiries that can be answered with knowing and understanding the meaning and nuances of a general purpose financial statement. Knowing where money is going when it either leaves your company or comes in is a vital part of owning and operating any business. Properly managing your level of risk, in order to potentially take more lucrative risks, requires proper bookkeeping. General purpose financial statements can be an influential instrument in helping your company to successfully grow.
Defining the general purpose financial statement
Customarily issued to aid investors and creditors in the decision-making process, general purpose financial statements are used as a financial guide. Available throughout the year, the actual definition of these financial statements in Australia is a financial statement that includes basic comprehensive information by the reporting entity. It is intended to be used by a broad group of people for a broad group of activities, which is why it is called “general purpose.” These statements are filled with useful financial information on a variety of topics including stock valuations, credit analyses, and a company’s financial position.
Statements of this nature can be useful in deciphering the business and financial condition of a company by uncovering essential details that help investors and creditors make informed investment decisions.
4 types of general purpose financial reporting
Curious about the different types of general purpose financial reporting? Different needs require a variety of reports, but together they provide a comprehensive look at a company’s overall operational activity. The four types of financial statements include Balance Sheet, Cash Flow Statement, Income Statement, and Retained Earnings Statement. Each report helps to identify any anomalies, inconsistencies, or trends that may require your attention. They also communicate vastly different financial information that is vital to meeting the needs of all interested parties.
Balance sheet: The balance sheet indicates a company’s available resources at a specific point, including any claims external parties may have against the company’s resources. Also known as the Statement of Financial Position, it’s called a balance sheet because the two sides will always equal each other—your assets must always equal the sum of your liabilities.
Cash flow statement: The cash flow statement focuses on the actual flow of cash, when money changes hands. It provides expected cash flow over a period of time. This statement encompasses all activities that are focused on the creation and use of cash including expected cash flow, financing, investments, and operations.
Income statement: Similar to a cash flow statement, the income statement is a valuable part of your business portfolio. It can be very helpful in attracting investors by showcasing your business’s performance over a certain period of time. This statement starts with sales and other revenue streams, then takes out all your expenses.
Retained earnings statement: Also called the statement of shareholder equity, the retained earnings statement specifies the accumulated loss or profit at the beginning and ending of the reporting statement. It also details the remainder of net income after a business pays out dividends to shareholders, displaying any changes during that time period.
Examples of general purpose financial statements
There are many examples of general purpose financial statements. A company or investor may see some of the following main financial statements in Australia:
Profit and loss
Changes in equity
Acquisitions and disposals
Financial assets and liabilities
The list goes on and on, but if outside users need additional information, they will need to look at reports beyond the traditional general purpose financial reporting methods, like shareholder minutes or the discussion and analysis reports from management.
Advantages and disadvantages
Financial statements can be helpful, but also lack certain information that might be beneficial for a company or investor. Understanding the strengths and areas of improvement for your general purpose financial statements can be a valuable asset to any business.
Some advantages include:
Pattern detection in the market: Can be used to predict a company’s future performance. May also predict where the market will be based on sales fluctuations from period to period. This information can help management take necessary steps in improving internal standards. For example, hiring the right marketing personnel for potential improvements to product sales or making a global move.
Budget preparation: Showcases a company's budget which can be helpful for future planning and the decision-making process. Depending on the needs of the entity, they can include estimations and information for varying types of budgets like flexible budget, expenditure budget, fixed budget, and more.
A few disadvantages include:
Market demand fluctuations: Product demands may vary based on market conditions which leads to a direct bearing on sales.
One-time analysis: Offers a company’s financial information at one point in time. There are no opportunities for comparison to determine if a company is operating in the right direction.
Special purpose vs. general purpose financial statements
Companies and investors have different reporting needs. Based on the requirements from the Australian Accounting Standards Board (AASB), financial statements in Australia need to be presented in a specific way. Thankfully, there are several different types of financial reports that a company should be able to produce.
Special purpose financial statements: Intended for a specific purpose or for presentation to a small group of users, these statements may be included with a complete set of financial statements. Examples include bank reporting, tax reporting, and industry-specific reporting. They are usually required by a government entity and may be presented separately.
General purpose financial statements: Generally prepared by utilizing the Australian Accounting Standards, these statements follow a specific format. They provide financial information about a reporting entity that is helpful for potential and existing investors. They differ from special purpose financial statements because they are issued throughout the year and include four different statement types.
When deciding special purpose vs. general purpose financial statements, keep in mind the needs of the company and investors, as well as your audience. Anticipating the needs of your end user and recognizing which types of statements are needed, will give you the powerful tools to help when approaching potential investors, identifying areas of weaknesses, and capitalizing on your strengths.
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