Finance Management

What Are Financial Statements, How To Do Them And Importance

admin • 17 Sep 2023

Financial statements are accounting reports of a company. They are necessary for several reasons – to fulfill obligations required by the Federal Revenue Service, to assist in decision-making and to give the manager a broad view of the financial life of the business.

To better understand what financial statements are and their importance, we have prepared this content. It also contains a list of the main documents that need to be issued by companies. Follow along!

What Are Financial Statements?

Financial statements are accounting reports issued by a company. They aim to detail your financial situation.

From there, it is possible to control a series of information about the finances of the business, understanding whether it operates in the red or is profitable , among other things.

Some financial statements are mandatory and have their issuance frequency defined by the Federal Revenue Service – normally those related to taxes. Some examples are the Balance Sheet , the Income Statement and the Cash Flow Statement.

But, in addition to complying with the obligation, the company can prepare these statements more frequently than required by law. The goal is to carry out a thorough analysis of finances or even render accounts internally to partners, shareholders and managers.

What Is The Purpose Of Financial Statements?

Financial statements , as we said, serve several purposes:

• report to the Federal Revenue;
• assist the government in collecting taxes;
• prevent fraud and tax evasion crimes;
• give the manager an overview of the company's financial health;
• help with decision making ;
• allow the manager to have more control over cash flow;
• make it easier to obtain insights that can be very valuable for business.

How Important Are Financial Statements for Companies?

It is through the analysis of financial statements that a company's managers can make smarter decisions about the future of the business.

And this applies to all areas, not just finance. After all, the entire company must function with the aim of generating profit .

Financial statements are also important for companies seeking credit, as they serve as proof of income and payment capacity.

As we have already said, they are also used as a way of reporting to shareholders, investors and partners. This is because not everyone is always present in the day-to-day running of the business. This makes it easier for you to see the company's financial health.

Just by constantly recording information and gathering data to prepare financial statements makes control over the company's accounts much greater. Managers’ knowledge of how the business operates also has an impact.

What Are the Main Types of Financial Statements?

Now, we have already shown what financial statements are and their importance for the company. So, let's present its main types and talk a little about each of them!

Balance Sheet

The main financial statement is the Balance Sheet. This is because it is through it that the company is able to show its current situation realistically and evaluate its assets.

The document consists of two columns, one for liabilities and one for assets. On one side, all the company's financial commitments are listed, that is, the amounts to be paid. On the other, everything that generates value is placed.

The difference between assets and liabilities is net worth . The Balance Sheet is mandatory and must be prepared at least once a year.

DLPA

The Statement of Accumulated Profits or Losses (DLPA) is a mandatory financial statement for some legal entities, such as limited companies. The document must include:

• the balance at the beginning of the period and adjustments from previous years;
• reservation reversals;
• net profit for the year;
• transfers to reserves;
• dividends;
• portion of profits incorporated into capital;
• balance at the end of the period.

DVA

The Added Value Statement (DVA) is a document that informs the wealth generated by the company in a specific period. Its objective is to facilitate the assessment of the company's role for social development and the economy in general.

Cash flow

Cash Flow is the record of all financial transactions that took place in the company in a given period. He must consider both internal cash inflows and outflows as well as financial investments and bank accounts.

Thus, management is able to know exactly where the resources were applied and what their main expenses were. In addition to better control, making this financial statement helps you make data-driven decisions.

DRE

The DRE, or Income Statement , is also one of the company's most important financial statements . It presents, in summary form, all the results obtained by the company in a given period.

As it must be carried out at least once a year, the most common thing is to analyze the last 12 months.However, it is also possible to have DREs for shorter periods, if managers want to have greater control over finances.
The DRE must have:

• gross sales revenue;
• sales deductions and rebates;
• taxes;
• net sales revenue;
• gross profit;
• cost of goods;
• financial and sales expenses;
• operating profit or loss;
• result of the year before Income Tax and the provision for it;
• net profit or loss for the year and its amount per share of share capital.

Explanatory Notes

Explanatory notes are documents that provide information to clarify the company's situation and can be related to any of the financial statements.

Typically, they are used to disclose information required by the government that is not found elsewhere in the documents. In addition, they provide additional information or indicate information about the basis for preparing the financial statements

How to Analyze Financial Statements?

The time has come to apply what you know about financial statements . To do this, we have separated three important tips to add to your documents.

Identify Trends

Financial statements not only reflect the past transactions of the company but also play a key role in providing insights into its future performance.

By analyzing these reports, it is possible to identify trends and patterns that can guide strategic decisions, such as investments, cost cuts and operational changes.

Taking advantage of this comprehensive perspective of statements allows for a more accurate and informed view of the company's financial health. Based on this data, you can make more assertive and informed decisions, anticipating future scenarios and adjusting your strategy accordingly.

Use More Than One Demo Type

When dealing with the financial management of your business, it is important not to skimp on using different types of financial statements . This way, you will have a comprehensive and more complete view of the economic situation.

This broad approach allows for proper compliance with tax obligations and also provides crucial information for making assertive decisions in the development of the company.

That's because combining a variety of statements helps identify trends, strengths and areas for improvement, allowing timely corrective action to be taken.

Cruse Information

Make comparisons between the information contained in the different financial statements . Also, cross-analyze with market data, political and economic scenario, and other relevant factors of the period under review.

This approach provides a comprehensive and in-depth context for better interpretation of data, allowing you to inform your actions.
By comparing information and contextualizing it with external information, such as market trends and economic indicators, you obtain a more complete and updated view of your company's situation.
This comprehensive analysis provides valuable insights to identify growth opportunities, potential risks and areas that require special attention.
Additionally, comparing financial statements helps detect inconsistencies or patterns that indicate errors or areas that require adjustment.

Are Statements Mandatory?

Financial statements have a mandatory part related to taxes. In this way, they serve as a basis for the company's fiscal analysis in relation to the generation of resources, payment of taxes and compliance with the chosen tax regime.

However, in addition, they are essential for effective business management and business success. After all, they provide transparency about the activity carried out, attracting investors, informing stakeholders and demonstrating credibility.
Not to mention that these documents also enable lines of credit and bank financing to invest in whatever is necessary for your growth.

Tips for Writing Financial Statements

So far you've learned a lot about financial statements , now is the time to prepare them using some tips to ensure maximum quality and effectiveness.

Use Accessible Language

In the financial and accounting world, there are specialized jargons that are not widely understood. When creating reports and statements, it is essential to use clear and accessible language, as not everyone involved in the company is familiar with financial terms.

In other words, simplify the information in your financial statements whenever possible to ensure that it is understood by readers.

Have a logical structure of information

When creating statements, it is essential to organize the information in a logical and clear way. Although there is no specific order, it is recommended to establish a coherent structure to present the results.

Furthermore, it is essential to properly separate information related to profits and losses. This way, any ambiguity or confusion in the interpretation of data by users is avoided.

Therefore, when compiling financial statements , make sure that you have an easy and accurate understanding of the information contained in the reports.

Focus on What Really Matters

Accounting statements contain a great deal of important information for accountants and financial professionals.

However, for those who are not experts in this area, the focus is on the key numbers that really impact the decisions of investors, managers and business owners.

When designing and compiling statements, it is critical to adopt a strategic approach and think like a manager. This means highlighting information essential for making decisions and developing effective action plans.

By presenting only relevant data, you provide a clear and concise view to stakeholders, increasing the accuracy and value of the information delivered.

Keep Data Up-to-Date

When preparing results for review by the company's management committee, it is crucial to be aware of the frequency of this review. Ensure that all relevant information is included in the submitted reviews.

It is extremely important to avoid presenting outdated data, as this can have a negative impact on both your work and the decisions made by the company. Therefore, it is essential to ensure the continuous updating of information.
Furthermore, all employees in the financial/accounting sector must be familiar with the reporting processes, the underlying logic and the data used.
This understanding allows everyone to contribute to the quality of the financial statements presented, promoting trust and accuracy in the information provided.