So, I’m sitting here, trying to write an article about the statement of operations and some other bits and pieces making up your audited financial statements . It’s audit season, I’ve got financial statements on the brain and don’t see any reason why you shouldn’t as well. And I’m writing stuff like “earnings over the period” and “losses over the period”. And then it occurred to me: “Gila Halleli, these fine folks probably have no idea what this ‘period’ thing is”.
Well, we cannot have that, can we?
Your financial statements are made up of a number of elements. The specific elements will vary based on where you are, applicable accounting standards, whether or not you are a private or public company, whether these are year-end or interim statements and so on. However the main elements are:
- Balance sheets
- Statements of profit & loss
- Statements of cash flows
- Statements of shareholders’ (or owners’) equity
- Notes to the financial statements
Your financial statements will generally be as of a certain date (e.g. December 31, 2017) but the statements will tie into that date in different ways.
|Tie into date/ period
|Presents a company’s financial position, that is, its assets and liabilities as of a certain point in time. There is no reset at the beginning of a period; if you had $100,000 in cash as of December 31, 2016, you don’t start over at zero on January 1, 2017.
You start out at the start of each period at the ending balance from the last period. Stuff happens over the course of the period to increase or increase those balances. At the end of the period—STOP! Whatever the balances are—you write those down. That is the balance sheet date.
|Statements of profit & loss (“P&L”)
|Presents a company’s activity—revenues and expenses—over a period of time. The statement covers a particular period which will always end at the balance sheet date. So if your balance sheet date is December 31, 2017, your P&L might be for the year ended December 31, 2017, the quarter ended December 31, 2017, the seventeen month period ended December 31, 2017, and so on.
You start out at zero on the first day of the period and record all of the revenues and expenses during that period. At the end of the period—STOP! You total up the revenues and expenses for the period and write those down. Then you start out again at zero.
|Statements of cash flows
|Presents a company’s uses of cash (cash coming in and out of the company) over time. The period will be the same as for the P&L and will also end on the balance sheet date.
The cash flow has one element that makes it a bit of a hybrid statement. It includes the cash balance (that’s an asset) on the first date of the period and the cash balance on the balance sheet date. In very simple terms, the statement looks like this:
Cash on the first day of the period (point in time)
+ Cash coming in during the period (over time)
– Cash going out during the period (over time)
=Cash on the balance sheet date (point in time)
|Statements of shareholders’ (or owners’) equity
|Presents a company’s ownership over time. This includes elements such as how the company’s ownership is divided up between different types of owners, how much has been invested in the company and the owners’ or shareholders’ portion in the net earnings or losses of the company from that period. The period will be the same as for the P&L and will also end on the balance sheet date.
Like the statement of cash flows, this is a bit of a hybrid. It presents the opening owners’ or shareholders’ equity balances (those are balance sheet items) on the first date of the period and the ending owners’ or shareholders’ equity balances on the balance sheet date. In very simple terms, the statement looks like this:
Equity balances on the first day of the period (point in time)
+ / – Activities occurring during the period (over time)
=Equity balances on the last day of the period (point in time)
|Notes to the financial statements
|The notes are used to relate back to all of the statements, as well as for providing additional information about a company that is important but might not show up in one of the statements. As such, the dates and periods covered will vary.
There may be information on activities that happened many years ago as well as on activities slated to happen in the future. Where numbers are provided, the note will note if this is as of a point in time or over a period of time and what that date or period is.
Why should I even care?
Excellent question! You might not care so much, but your investors, lenders, potential investors and other parties that use your financial statements will care. Knowing the date or the time period a set of statements allows one to add some context to the information within.
- How recent or dated are the financial statements? The older they are, the more likely it is that the situation within the company has changed since they were completed. In startups, for example, a year is an eternity.
- Do the statements only cover a short period (e.g. a month or a quarter)? Do the statements cover the year-to-date or just that specific period? Maybe that period isn’t representative of what happens over a whole year. For example, a company that deals in a tourism-related product may have much higher revenues and expenses in the summer than it does the rest of the year. If they send you statements that only show you Q3, and completely leave out the other quarters, you probably won’t have a good idea of how successful (or not) the company is.
- Where does one place a set of financial statements within an industry or global timeline? Say you are looking at financials from a year ago –not terribly old—and they look fantastic. But then you remember that over the following year, after the balance sheet date, there was a huge shift in exchange rates or there was a change in critical legislation impacting the company’s industry, changes to tax laws where the company operates or a sudden shift in consumer habits. The date and time period let you know that these financial statements do not reflect those changes, and so you need to get updates in order to have a decent idea of what’s going on in the company after these changes.
Do you see why this is important? As such, you, as the company, should make sure that you have updated and complete statements on hand. In addition, where something has happened in your industry or environment, be aware that you will probably receive questions from interested parties (lenders/ investors/ etc) along the lines of “hey, your results were great last year, but what about X????”