The presentation of financial statements refers to the arrangement and structure of the information in financial statements to provide meaningful and understandable information to users. The primary financial statements that are typically presented are the balance sheet, income statement, statement of cash flows, and statement of changes in equity. Here are the key elements and considerations for the presentation of financial statements:
- Balance Sheet:
- Assets: Assets are presented in order of liquidity, with the most liquid assets listed first. Common categories include current assets, non-current assets, and intangible assets.
- Liabilities: Liabilities are typically presented in order of maturity, with the most immediate liabilities listed first. Categories include current liabilities and long-term liabilities.
- Equity: Equity is presented after liabilities, and it includes various components such as share capital, retained earnings, and other reserves.
- Income Statement:
- Revenue: Revenues are listed first, followed by the cost of goods sold (COGS) or cost of services provided. The difference between revenue and COGS gives the gross profit.
- Operating Expenses: Operating expenses, such as selling and administrative expenses, are presented next, followed by any non-operating income or expenses.
- Net Income/Loss: The net income or loss is calculated by deducting the total expenses from the gross profit and adding or deducting non-operating items.
- Statement of Cash Flows:
- Cash Flows from Operating Activities: Cash flows from operating activities are presented using the direct method or indirect method, detailing the cash receipts and payments related to day-to-day operations.
- Cash Flows from Investing Activities: Cash flows from investing activities include cash flows related to the purchase or sale of assets, investments, or other long-term investments.
- Cash Flows from Financing Activities: Cash flows from financing activities involve cash flows related to equity transactions, borrowing, and debt repayments.
- Statement of Changes in Equity:
- Beginning Equity: The statement begins with the opening balance of equity from the previous period.
- Changes in Equity: It shows the details of changes in equity during the period, including share issuances, dividends, net income, and other comprehensive income.
- Ending Equity: The statement concludes with the closing balance of equity at the end of the period.
In addition to the specific presentation of each financial statement, it is important to consider the use of clear headings, subheadings, and proper formatting to enhance readability. The financial statements should also include appropriate notes and disclosures to provide additional information and context to the users. These notes may include explanations of accounting policies, contingencies, related-party transactions, and other relevant information.
Overall, the presentation of financial statements aims to provide relevant, reliable, and understandable information to users, allowing them to make informed decisions about the financial performance and position of the entity.