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What are financial reports?

Financial reporting is a common accounting practice in which financial statements are used to display a company’s financial information and performance over a certain period of time, usually annually or quarterly. 

In simple terms, a financial report is necessary for understanding how much money you have, where it comes from, and where it needs to go. 

Financial reporting enables managers to make informed business decisions based on the company’s financial health. 

Potential investors and banks will look at your company’s financial reports to see whether they want to invest or lend you money.

What is the reason for keeping organized financial records?

Financial reports are used by businesses to compile accounting data and provide information about their current financial situation. 

Many financial reports are accessible for public review, and they are used to forecast future profitability, industry position, and growth.

Financial reports are important since they fulfill several key objectives such as 

-tracking cash flow

-evaluating assets and liabilities

-analyzing shareholder equity

-measuring profitability

Types of Financial Reports

Balance Sheet

A balance sheet shows the assets, liabilities, and shareholders’ equity of a corporation at a specific point in time.

A simple look at the balance sheet will reveal total assets minus equity and liabilities. Balance sheets are often tracked quarterly, and data from balance sheets may be included in annual reports. 

Your present asset liquidity and debt coverage are also assessed in real time using balance sheets.

Example:

Balance sheet displays the total assets, liabilities, and equity of the organization.

Shown below is an example. 

Main use of the balance sheet is to indicate a company’s financial situation at a given moment in time. When the balance sheets for multiple consecutive periods are brought together, patterns in the various line items can be seen, this information becomes even more useful.

Income Statement

While a balance sheet examines current operations, an income statement examines them over a longer period of time. Some companies keep quarterly income statements and use them to track financial activities throughout the year.

The income statement shows sales, net income, expenses, and earnings per capital share when a firm issues stock on the stock exchange.

The income statement and the profit-and-loss statement are the same document for reporting earnings and losses.

Example:

Income statement displays the sales, revenue, expenses, and losses of the organization.

The income statement is used by research analysts to analyze year-over-year and quarter-over-quarter performance. One can determine if an organization’s efforts to lower the cost of deals benefited it in further growing benefits over time, or whether the administration worked out how to keep tabs on working expenses without sacrificing productivity.

Cash flow Statement

The cash flow statement is useful for determining how efficiently businesses earn cash to pay off debts. 

Cash flow documentation also includes how successfully organizations fund operations and investments, as well as the continuing activities that create income to cover costs. 

Understanding the efficiency of present procedures, spending activities, and income generation requires accurate cash flow statements.

Example:

Cash Flow statement shows the current operations, spending/ investing activities, and financing activities of the organization. Show below is an example statement of cash flow.

Cash flow statement is used to manage finances by tracking the cash flow for an organization. Cash Flow statements are extremely useful for the management to take informed decisions for regulating business operations.

KLOUDAC Accounting Firm Dubai, UAE

KLOUDAC is a recognized accounting firm in Dubai, UAE with 15 years of service experience. We have built connections with over 500 customers. It has also won the certification of Xero Payroll and certification of Xero advisor from the world leading online accounting software – XERO. Moreover, KLOUDAC is a golden champion partner of Xero.  Accounting and Bookkeeping is more convenient for the SMEs via KLOUDAC since they provide their clients with a whole package of services such as Financial Consultancy, Business setup, Audit and assurance services, Taxation services, Recognized accounting software and more.

An income statement depicts a company’s profitability over a period of time. In other words, it summarizes revenues and expenses resulting from operating and non-operating activities. It also shows the company’s net profit or loss. It is one of the most important documents in a business’s financial reporting.

Alternative names for income statement

-Profit and loss statement

-Statement of revenue and expenses

Understanding Income Statement

The income statement is a crucial component of a company’s performance reports that must be filed with the Securities and Exchange Commission (SEC). The income statement reports income over a specific time period, whereas the balance sheet provides a snapshot of a company’s financials as of a specific date.

Key Terms that the income statement focuses on:

Operating revenue

Operating revenue is a term used to describe revenue generated by primary activities. 

The money earned from the sale of a product by a manufacturer, wholesaler, distributor, or retailer is referred to as revenue from main activities. Similarly, revenue from services refers to the fees a company in the service industry receives for providing particular services.

Non-operating revenue

Revenues realized through secondary, non-core business activities are often referred to as non-operating recurring revenues. These include income from interest earned on business capital lying in the bank, rental income from business property, strategic partnerships, or royalty payment receipts.

Gain

Gains, also known as other income, are the net proceeds from other operations such as the sale of long-term assets. Net income from one-time non-business operations, such as a company selling an outdated transportation van, abandoned land, or a subsidiary company, is included in this category.

Expenses

Also known as operating expenses. These expenses include rent, bank and ATM fees, equipment costs, marketing and advertising costs, merchant fees, and any other costs necessary to keep your business running.

Losses

All costs associated with a loss-making sale of long-term assets, one-time or other unusual costs, or expenses towards lawsuits.

Structure of the Income Statement

For the income statement, the net income is calculated as below:

Net Income = (Revenue + Gain) – (Expenses + Loss)

For example, assume that:

Total Revenue = USD 25,000

Total Expenses = USD 10,500 

Gains = USD 2,000

Losses = USD 800

Therefore, the Net Income will be:

Net Income = (Revenue + Gain) – (Expenses + Loss)

      = USD (25,000 + 2,000) – USD (10,500 +800)

      = USD 15,700

KLOUDAC Accounting Firm Dubai, UAE

KLOUDAC is a recognized accounting firm in Dubai, UAE with 15 years of service experience. We have built connections with over 500 customers. It has also won the certification of Xero Payroll and certification of Xero advisor from the world leading online accounting software – XERO. Moreover, KLOUDAC is a golden champion partner of Xero.  Accounting and Bookkeeping is more convenient for the SMEs via KLOUDAC since they provide their clients with a whole package of services such as Financial Consultancy, Business setup, Audit and assurance services, Taxation services, Recognized accounting software and more.

There are some business key terms that you should know well if you are an entrepreneur or even an experienced businessman. If you are planning to manage your business and your finances properly, it is very important to clearly understand the meaning of each of these key terms. 

Out of dozens of business key terms, mentioned below are a few important terms along with their meaning.

Accounting

A systematic way of recording and reporting financial transactions for a business or organization.

Assets

Anything the company owns that has monetary value. 

Current assets (CA) are those that will be converted to cash in the next 12 months. This could be cash, inventory, or accounts receivable in most cases.

Fixed assets, such as real estate, land, and major machinery, are long-term investments that will likely benefit a company for more than a year.

Balance Sheet

Balance Sheet is a financial report that summarizes a company’s assets, liabilities and owner or shareholder equity, at a given time.

Cash Flow

Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. Cash flow can be positive or negative. Positive cash flow indicates that a company has more money moving into it than out of it

Cost of Goods Sold

The total cost of producing the goods sold by a business.

Double entry bookkeeping

Double-entry bookkeeping is a system of documenting transactions in which each company transaction is entered as a debit or credit in at least two accounts. The amounts entered as debits must equal the amounts recorded as credits in a double-entry system.

Expenses

Expenses refer to the costs of conducting business. 

The types of expenses include fixed, variable, accrued, and operation expenses.

Fixed Expenses: Rent, salary, and insurance payments are all fixed expenses that do not change month to month.

Variable Expenses: Expenses that may fluctuate over time, such as labor costs.

Accrued Expenses: an unpaid expense that has been incurred.

Operation Expenses: Expenses incurred by a company that is not directly related to the production of goods or services. For example, advertising cost.

Inventory

The term Inventory refers to the assets that a business has purchased to sell to its clients but has yet to sell. The inventory account will decrease as these things are sold to customers.

Liabilities

Liability is when someone owes someone else money.

Current liabilities (CL) are those debts that are payable within a year, such as a debt to suppliers. 

Long-term liabilities (LTL) are typically payable over a period of time greater than one year. An example of a long-term liability would be a multi-year mortgage for office space.

Loss

A loss occurs when a service or product sells for less than what it cost to produce or create it, or when an asset’s expenses exceed its income.

Net Income

The amount earned in profits is referred to as net income. It is computed by deducting all the expenses in a given period, including COGS (Cost of Goods Sold), Overhead, Depreciation, and Taxes, from Revenue.

Profit

Profit is a term used to represent the financial gain made by a company when revenue exceeds costs and expenses.

Profit = total revenue – total expenses

Revenue

Revenue is any money earned by the business.

The gross income a company earns from normal business activities is referred to as revenue or sales. Multiply the sale price by the number of units sold to get the sales revenue. Revenue is calculated differently by accrual accounting and cash accounting. Accountants consider sales made on credit when utilizing the accrual accounting method to compute revenue. Cash accounting counts sales as revenue only after the company has been paid.

KLOUDAC Accounting Firm Dubai, UAE

KLOUDAC is a recognized accounting firm in Dubai, UAE with 15 years of service experience. We have built connections with over 500 customers. It has also won the certification of Xero Payroll and certification of Xero advisor from the world leading online accounting software – XERO. Moreover, KLOUDAC is a golden champion partner of Xero.  Accounting and Bookkeeping is more convenient for the SMEs via KLOUDAC since they provide their clients with a whole package of services such as Financial Consultancy, Business setup, Audit and assurance services, Taxation services, Recognized accounting software and more.

Bills that arrive unexpectedly can throw your budget or savings plans off track. 

We all have monthly costs to pay, such as rent, electricity, insurance, and purchase expenditures and other expenses. So first we should plan a budget for  these essential expenses. And Unexpected payouts can be sudden accidents, disasters or even when environmental changes occur. So mentioned below are several strategies that will help you to avoid disputes and save money. 

Sell more Items

Entrepreneurs can turn to e-commerce websites and sell their items faster. You can also add your items to auction sites and earn money. You might even be able to sell anything using the new hyperlocal community applications, which are replacing the message board at the local grocery store.

Earn extra income

Companies can work a bit more extra hours to cover up their tasks/projects so that they can get paid as soon as they complete them. You also can take more short projects and complete faster. Whenever you receive unexpected payouts, always try being ahead in your project work so that you will be paid well. In that way you will be free from extra deductions e.g.: Failure to provide goods or items on time. 

Take Short-term money loans

Taking out a short-term money loan from a bank can help with the one-time cost of unexpected expenses. Instead of paying for an expense all at once, you can spread the cost out over several months with these loans. Examine the fine print of any loan agreement carefully, especially the fees and interest rates you may be charged, which, depending on the lender, might be substantial.

Re-Plan your Budget by removing sunk costs

Sunk costs are irrelevant costs that would not directly affect the process of the company. They can be things like buying newly released machineries, equipment when you already have fully functioning machinery right in your office.  But certain expenses cannot be avoided, as previously mentioned, there can be expenses for the utility bills, rental payments so such expenses should be added to the budget and sunk costs should be removed from the budget you have already allocated.  

During incidents where you suddenly prepare yourself for unexpected payments it’s always wiser to replan your normal budget by prioritizing and spending money on the most important and urgent expenses. For example, you can make products instead of purchasing from a supplier as well.

Make sure you are prepared for next Time

The time you will have to be prepared for unexpected payouts is unpredictable therefore you should always be ready for such instances when you are running your own company. One or more strategies mentioned above will help you to get rid of such expenses or else to plan yourself for such instances. 

You can also consider Saving money in a high yield savings account. In that way even a smaller amount that you saved will help you a lot when it comes to the burden of your next unexpected expense.

KLOUDAC Accounting Firm Dubai, UAE

KLOUDAC is a recognized accounting firm in Dubai, UAE with 15 years of service experience. We have built connections with over 500 customers. It has also won the certification of Xero Payroll and certification of Xero advisor from the world leading online accounting software – XERO. Moreover, KLOUDAC is a golden champion partner of Xero.  Accounting and Bookkeeping is more convenient for the SMEs via KLOUDAC since they provide their clients with a whole package of services such as Financial Consultancy, Business setup, Audit and assurance services, Taxation services, Recognized accounting software and more.