Good financial statements empower your company to make better strategic decisions, but how do you know if your financial statements are good? If they're not, how do you make them better? Some basic principles separate the good from the bad, but your financial statement quality also depends on how well suited it is to your audience.
This blog is the second of a three-part series on how to create better financial statements:
Part 1:6 Elements of a Good Financial Design Statement
Part 2: Formatting Best Practices for Financial Statements
Part 3: Data Visualizations for Financial Statements
What makes a financial statement useful?
FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
Relevance
Information is relevant if it is capable of affecting users' decisions, either because it helps them predict future business conditions or because it provides feedback on prior predictions. Irrelevant information takes up valuable report space and may confuse users.
Faithful Representation
To faithfully represent information, it must be complete, unbiased, and error-free. Perfectly faithful representation is rarely possible but try to get as close as you can.
Comparability
Information is more useful when it can be compared with similar information about another entity or with similar information about the same entity from a different time period. Being consistent about how you format your reports and what information you include will help with their comparability.
Verifiability
Information is verifiable if different knowledgeable and independent observers could reach a consensus that the information is faithfully represented. Verifiability gives users confidence about the accuracy, completeness, and neutrality of the information.
Timeliness
Information needs to be available to decision-makers in time to be capable of influencing their decisions. Older information can still be timely if it allows users to identify and assess trends.
Understandability
Information should be clear and concise and fit the audience's knowledge level.
Sometimes it is not possible to meet all of the above criteria at once. For example, you may spend so much time ensuring that the information on a report is complete that it ceases to be timely. Good report writing requires you to find an acceptable balance between conflicting goals.
Matching your reports to your audience
There are two main types of reports: financial reports and management reports. Which one you choose depends on your audience.
Financial reporting
Financial reports are aimed at external users who need to make decisions regarding your company, such as whether to invest or to extend a line of credit. They are more formal in structure and content because they must follow GAAP rules. Since all companies follow the same structure and content rules, it is easier for users to compare two companies' reports.
Management reporting
Management reports are aimed at internal users who need to make decisions on the company's behalf. Since these reports are not seen by outsiders, you can provide more in-depth information without giving away proprietary information. You do not need to follow the strict structure and content rules that apply to financial reports, but you should still ensure your reports meet the FASB qualitative characteristics. While you have more freedom when creating management reports, you also have to make more decisions and therefore have more room for error.
How ActivReporter makes your reports better
ActivReporter'sdrilldown feature allows authorized users to obtain detailed information about the individual transactions that make up the big picture numbers, while published reports provide the necessary information to external users without giving away non-public information.
Report templates allow you to quickly create consistent, up-to-date financial reports, while the native excel features make it easier to create any management report imaginable. ActivReporter'ssecurity permissions allow you to tightly control which members of your organization can see which pieces of information.
During our series on how to create better financial statements we've shared some best practices for formatting both types of reports, looked at various data visualizations, and in this blog, discussed FASB's qualitative characteristics of useful financial information, and the differences in purpose between financial and management reporting. Now you should be ready to present your financial designs to your team!
FAQs
The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.
What are the elements of a good financial statement? ›
There are five main elements of financial statements that are typically measured: assets, liabilities, equity, income, and expenses.
What are the 6 qualitative characteristics of financial information? ›
What makes a financial statement useful? FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
What are the 5 elements of the financial statement? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
What are the elements of financial statements define each elements? ›
The 10 elements are: (1) assets, (2) liabilities, (3) equity, (4) investments by owners, (5) distributions to owners, (6) revenues, (7) expenses, (8) gains, (9) losses, and (10) comprehensive income. The 10 elements of financial statements defined in SFAC 6 describe financial position and periodic performance.
What are the 8 general features of financial statements? ›
IAS 1 explains the general features of financial statements, such as fair presentation and compliance with IFRS, going concern, accrual basis of accounting, materiality and aggregation, offsetting, frequency of reporting, comparative information and consistency of presentation.
What are the 4 important types of financial statement? ›
There are four primary types of financial statements:
- Balance sheets.
- Income statements.
- Cash flow statements.
- Statements of shareholders' equity.
A financial statement is like the GPS of an organization- one that provides you with a picture of its financial performance The documents can reveal a company's true health and trajectory. They provide a comprehensive snapshot of an enterprise's financial activities and position.
What are the seven key elements that the financial statements comprise? ›
Your financial plan should include seven key elements (which we will cover in more detail below): your profit and loss statement, operating income, cash flow statement, balance sheet, revenue projection, personnel plan, as well as your business ratios and break-even analysis.
What are the 10 qualitative characteristics of financial statements? ›
They are relevance, reliability, objectivity, ability to be understood, comparability, realism, consistency, timeliness, economy of presentation, and completeness.
The income statement provides deep insight into the core operating activities that generate earnings for the firm. The balance sheet and cash flow statement, however, focus more on the capital management of the firm in terms of both assets and structure.
What are the objectives of a financial statement? ›
To provide accurate information on the fluctuation of economic resources. To offer information on the organisation's net resource changes. To offer accurate information on net economic resource changes. To offer information on the changes in the organisation's net resources due to profit-oriented activities.
What are the three-three accounting values? ›
The three elements of the accounting equation are assets, liabilities, and shareholders' equity. The formula is straightforward: A company's total assets are equal to its liabilities plus its shareholders' equity.
What are the five elements of financial statements and briefly give their descriptions as per the IASB framework? ›
This chapter describes the objective and scope of financial statements and provides a description of the reporting entity. This chapter defines the five elements of financial statements—an asset, a liability, equity, income and expenses.
What are the 4 primary financial statements 5 list and describe what appears on them? ›
They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
What are the components of a complete set of financial statements? ›
What are the Components of Financial Statements? The components of Financial Statements are the building blocks that together form the Financial Statements and help understand the business's financial health. And consists of an Income Statement, Balance Sheet, Cash Flow Statement, and Shareholders' Equity Statement.
What are the components of the financial information system? ›
Financial Information System generally consists of six main components: people, procedures, data, software, information technology infrastructure and internal control.
What are the key components of financial statements and how are they used to assess a company's financial health and performance? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are the components of consolidated financial statements? ›
Consolidated financial statements normally include consolidated balance sheet, consolidated statement of profit and loss, and notes, other statements and explanatory material that form an integral part thereof.
