Understanding financial statements Definition, Scope, and Types

Understanding financial statements: Definition, Scope, and Types

Contact Us

Accounting

If you are considering to start up a business in Hong Kong, you should be well versed with how to operate a business. The entrepreneurs who are busy with running the business are likely overlooking or not paying enough attention to one of the most important things: monitoring their business’ financial performance.

It is not just about starting a business but it is also important to ensure that the business is scaling up with a strong financial growth. And they can do so by keeping records and maintaining financial statements and analysing growth trends. It is imperative for business owners to become acquainted with these financial statements in order to make wise decisions for their businesses.

What is a financial statement? What is the role of financial statement? This guide is all that you need to know about a financial statement and how it is important for business development.

Financial Statement

What is Financial Statement?

The financial statements of a business consist of several reports and documents. The financial statements provide a broad picture of company’s financial performance over a certain period of time, such as a year or a quarter. Consolidated financial statements showcase the company’s financial state, vulnerabilities and impact of essential decisions on spending.

In addition to profits and losses, financial statements give information about the assets and liabilities, cash flow, etc. Generally, companies prepare these statements on an annual basis and comply with HKFRS (Hong Kong Financial Reporting Standards), a standard which is laid down by HKICPA (Hong Kong Institute of Certified Public Accountants).

Unsure about the tax filing deadline in Hong Kong? Click the link to read our informative article 2024 Tax Filing Season: Tax Deadline 2024 in Hong Kong You Need To Know About!

Discover the opportunities within Hong Kong’s innovative tax system with FastLane!
Book a call now

Importance of Financial Statements

If you are an owner of business in Hong Kong, you must make sure that you comply with tax and all the other relevant regulations. The Hong Kong Inland Revenue Department requires that companies in Hong Kong should be filable for tax in the set time, hence it is necessary to keep financial records and account statements.

Besides the tax compliance, preparing financial statements will have numerous advantages for the entrepreneurs.

Assessing Financial Well-being

Financial statements can be used as a basis to check the growth in the financial status of your business. You will understand if your business is making a profit, loss or breaking even.

Facilitating Informed Decision-Making

Financial statements are the bases on which business owners can make effective, data-driven decisions. Developing business strategies in the absence of any data is like going to war without a gun. With the availability of timely information, companies will make decision-making easier and they will have a better long-term growth strategy.

Keeping the accounting records can help you to compare the statements with each other over the years and see how your business is making progress–and even if not, what steps you can take.

Strategic Planning and Budgeting

Data from financial statements can be used to design a goal or a purpose oriented financial strategy and thereafter creating a budget to support the strategy. This way of financial statement analysis provides an insight into the areas where you can make savings, how much debt you can pay, or how to improve profits.

Attracting Investors

Organizations can also include the statements in their reports for the clarity of shareholders and investors to make financial decisions. Also, the investors ask for statutory to estimate your company’s soundness, and they provide investment capital for your company.

Through the use of professional financial service providers, you will ensure that your financial records are accurate, and they will also be compliant with the accounting and tax regulations of Hong Kong.

Related article: Salary Tax Return (BIR60) Guide for Business Owner

Types of Financial Statements?

The companies have to maintain the various types of financial statements – balance sheet, income statement, cash flow statement, and earnings per share statement. To go further, each of these statements will be discussed in detail.

Balance Sheet

A balance sheet gives detailed information about a company’s assets, liabilities and shareholders’ equity. Assets and liabilities are both comprised of current and non-current. Assets in the balance sheet are assets of the company which are valuable possessions, such as machinery and equipment, property, investments, trademarks, or patents. Conversely, liabilities are the company’s obligation to other entities, which may include rent arrears, bank loans, tax payable, etc.

Shareholders’ equity is the amount of money that a company will be left with after paying off all the liabilities and selling off all the assets. The figure is the company’s net asset or value and is comprised of contributed capital and retained earnings.

Income Statement

The income statement, usually referred to as the profit and loss statement, provides you with the amount of the revenue that your company has earned and the expenses that have been incurred during the year. The income statement of the company can be used to find out the net profit or net loss of the company, at the end of the report. The income statement is a key tool for monitoring the financial performance over the years, which the entrepreneurs can use in making the necessary adjustments of their growth strategies.

The main components of an income statement include revenue, cost of goods sold, gross profit, operating expenses, operating profit, other income and expenses, and net profit/loss.

Cash Flow Statement

Considered the most important statement for small businesses, the cash flow statement tells how well the company generates or manages cash. In other words, it focuses on the cash inflow and outflow from business activities for the tax year. The cash flows statement is derived from the balance sheet and income statement to find out what the company has collected. When cash flow is positive, it shows more cash inflow, and when it is negative, it implies poor cash management which can affect growth in a business.

Cash flows statement is classified into-operating activities, investing activities, and financing activities.

Operating activities: The operating activities section presents cash inflows and outflows that are associated with the company’s operational activities. It involves payments to suppliers or employees, depreciation, amortisation, and other operating expenses.

Investing activities: This part outlines the amount of cash that the company has generated from the investments. For instance, if the company purchases equipment, the cash flow statement will classify it under investing activities since the company has spent cash to acquire a long-term asset. Similarly, proceeds from the disposal of assets or investment securities are considered as cash from investing activities.

Financing Activities: Cash paid or received from financing the activities of the company is classified under financial activities. For instance, dividends’ payment or loans’ repayment is cash outflow, and capital raising is cash inflow.

Cash flow statements analysis allows business owners to identify the major sources of cash inflow and assess the amount of money they need to spend on all business expenses, therefore, making cash management better.

Statement of Retained Earnings

Alternatively referred to as a statement of shareholders’ equity, it discloses the company’s retained earnings. The statement indicates the level of profitability being retained in the business by the shareholders’ equity. In general, firms reinvest retained earnings or clear business liabilities. Business owners can determine how much money the company needs to achieve financial planning goals or demand more capital investment upon learning about shareholders’ equity.

Notes to the Financial Statements

All the assumptions made during the preparation of financial statements are documented in this file. This also involves the accounting policies, contingent liabilities, gross profit, and which method was used for recording – cash or accrual. This document is optional, but it assists in understanding information in other financial statements and leaders can see what shareholders equity is.

All of the above assertions are critical in assessing your company’s financial health. Assistance may be required for larger organizations in the maintenance of these financial statements. 

With professional accounting and tax service partners like FastLane, businesses can ensure accurate record-keeping and data analysis, ensuring compliance throughout the year.

Seeking guidance on tax compliance in Hong Kong? Click the link to our article for expert advice and insights!

Maximize the efficiency of your annual tax submissions with FastLane, empowering you to confidently claim your exemptions.
Book a call now

Who is responsible for preparing an annual financial statement?

An annual financial statement is an extended overview of a company’s financial performance over a fiscal year. Usually, it is produced by the finance department within the company or by external professional accountants engaged for this. This all-encompassing document gives an overview of the company’s financial condition, presenting major indicators such as income, costs, assets, debts and shareholders’ equity. The stakeholders, who are the investors, creditors and regulatory authorities, find the annual financial statements to be very important as they give them the information about the financial position, performance, and profitability of the company. Precise and open financial reporting is necessary for keeping confidence, compliance with accounting standards, and smart decision-making within the organization.

Conclusion

The financial statements are important documents, which reflect the financial condition of a company. However, when all financial statements are consolidated, you gain an insight into the comprehensive income of your company from various financial perspectives. By reviewing and analyzing financial statements such as the income statement or balance sheet, entrepreneurs can make informed and smart decisions for their company’s future success.

However, business owners may find it difficult to keep all the financial statements and stay on top of all financial decisions. FastLane’s professional bookkeeping services enable account maintenance and preparation of unaudited financial statements. Our professional accountants keep your books updated and file your taxes on time, allowing you to concentrate on business development. Contact one of our FastLane experts today!

hello there