Financial Statements

Financial statements are the way modern accounting communicates the results of accounting ... the state and the performance of the organization. The purpose of collecting, organizing and storing financial transaction data is to understand and report on the state and performance of the organization to the stakeholders.

Financial statements are routinely prepared to include:

• a balance sheet
• an activity statement; and,
• a cash flow statement

In years past, the preparation of accounts was a 'once a year' exercise, but that time is long gone. Now companies are expected to report their financial state and performance every three months. Inside the organization, the preparation of financial reports to monitor the progress of the organization is more frequent, usually monthly ... that is twelve times a year.

Getting the frequency of financial reporting right is important. If the reporting is done too often it becomes a burden both for those responsible for preparing the reports and for those who should be analyzing the results. If the time interval between reports is too long, there is too long a delay in responding to the information and taking corrective action. Financial reporting once a month is probably the best compromise.

The periodic reports may merely confirm that what was expected has actually happened ... or it may show up performance issues that need to be addressed. With monthly reports there is a realtively short time from the time the data is collected to the time the data summaries are reported.

Balance Sheet

The balance sheet is one of the most powerful analysis tools in accountancy ... critical in corporate financial analysis ... but alas, missing in much of public sector financial reporting. A balance sheet is accountancy shorthand that describes the financial conditions of an organizational entity. It shows assets and liabilities and explains how the difference between hem came about.

A balance sheet is an efficient way of showing with very few numbers the impact of thousands or millions of individual financial or economic transactions and comparing the balance sheet from different dates makes it possible to measure progress very tangibly and very easily.

Activity Statement ... Profit and Loss Account

There are various names given to an activity statement. These include operating statement, profit and loss account, income and expenditure account ... and all serve to explain the use of resources and what was received in return.

While the balance sheet is useful in describing how much change has happened ... the activity statements serve to explain how the change happened. These statements may be in summary form ... or in great detail depending on the need for analysis. They show all the costs and all the revenues or income summarized from the transactions in an organized way.

The information from an activity statement shows the manner in which the balance sheet changed. The profit or surplus reported in an activity statement for a period prepared under double entry accounting rules is the same as the change in the balance sheet from the beginning to the end of the period.

In GAAP money profit accounting the data and analysis most usually apply to an organization. Most of the analysis has a focus on improving the performance of the organization. In TVM Value Accountancy, the data and analysis are are also concerned with people, place and planet ... in other words, the social, community and environmental impact of economic activity.

Cash Flow Statements

A cash flow statement is a clarifying presentation that shows the way cash has been used, and how cash has been acquired.

A cash flow statement repeats much of what is in the activity statement, excluding transactions that have no cash impact and including transactions that have impact on cash but not on the calculation of profit.

For example:

• Depreciation has an impact on profit reporting, but not on cash.
• Financing has an impact on cash but not on profit.
• Changes in level of inventory have an impact on cash, but not on profit. Use of inventory in cost
• of sales, has an impact on profit.

Notes to Accounts

While good accountancy should be very clear and based on sound accounting principles, there are times when there is a need for some explanation. Notes are an integral part of a set of accounts.

In much of modern accountancy the notes have become very complex, and it is not at all easy to understand the impact of these notes on the financial statements themselves.

But nothing will happen unless there are reports. Reports should be part of a system and report nothing as reliably as they report something of significance ... in other words accountancy has reports that are not a subset of journalism but are an independent system in their own right.

Analysis and reporting costs and value

The process of collecting, organizing and storing data has a cost, and not much value. But analysis and reporting makes these data valuable and powerful. Analysis may merely confirm that what was expected has happened ... or it may help to deepen understanding and facilitate new and better ways of creating value.

But nothing will happen unless there are reports. Reports should be part of a system and report nothing as reliably as they report something of significance ... in other words accountancy has reports that are not a subset of journalism but are an independent system in their own right.