External Financial Statement

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External Financial Statement

External Financial Statement

The field of accounting is a profession dedicated to the responsibility of company account record keeping, budgetary planning, financial analysis, accounting management, and periodic financial statement reporting. An accounting degree holder can become a certified public accountant (CPA) practice leader, qualified to oversee the external accounting audit and other accounting activities of a business, organization, or public administration. Students studying toward an undergraduate degree can meet the qualifications for an advanced accounting degree program once they have matriculated with a B.A. or B.S. in Accounting. Most graduate accounting degree programs require an undergraduate degree in accounting to meet the eligibility requirements of an M.A., M.S., DBA or PhD program. Demonstration of higher mathematics competency, including calculus of financial statements (i.e., ratios)is required for completion of an accounting degree program. Students also learn the regulatory standards of professional accounting practices for the purposes of domestic and international compliance with the law. Our tutors at 24HourAnswers can address the needs of students studying toward a degree. Our team of highly qualified tutors are subject matter experts trained in accounting and related subjects such as finance and economics.

Here are some insights about the Accounting topic ‘external financial statement:’

Preparation for audit involves external reporting of a company’s financial record for a given period. The main financial statements, balance sheet, statement of comprehensive income or income statement, and cash flow statements provide an overview of an company’s financial activities, and serve as disclosure for investors, creditors, and lenders. The compilation of financial records for audit and periodic (i.e., quarterly and annual) reporting to shareholders, is performed by the chief financial officer (CFO) of a company and an external CPA. In addition to fulfilling U.S. Internal Revenue Service (IRS) taxpayer reporting obligation, the external financial statement is the basis for a company’s capital structure required for financing and investment consideration. Financial analysts use the financial statements to calculate ratios, and for assessing an entity’s financial strength in relation to other similar competitive companies.

The Three Main Statements

The balance sheet containing the statement of shareholder equity exhibits the overall financial position of a company, whereas the comprehensive income statement and cash flows statement identifies line-item profit and loss-related costs, expenditures, and revenues, as well as operational cash inflows and outflows for a period. The following outlines the three main statements:

  1. The balance sheet is a record of a company's “book value” or financial worth, reported in three parts: assets, liabilities, and shareholders’ equity. Assets like accounts receivable and cash exhibit the operational efficiency of a company. Liabilities include expenses and outstanding debt capital. The statement of shareholders’ equity includes reporting of equity capital and retained earnings from periodic net income. Within the audited financial statement, the balance sheet must exhibit shareholders equity as equal to assets minus liabilities, the company’s book value. A key performance metric, the book value is a record of financial activity, increase or decrease of a company’s value during the reporting period.
  2. The income statement is the profit and loss statement of revenue against expenses, resulting in a company’s bottom line net income profit or loss. The income statement is divided into three sections: revenue and direct costs, indirect expenses, and net profit. Revenue and the direct costs establish the record of a company’s gross profit. Indirect expenses (i.e. depreciation, marketing costs, and general costs) are subtracted from operating profit. Net profit includes the deduction of interest and taxes.
  3. The cash flow statement is the overview of a company's cash flow from operating, investing, and financing activities for the period. Net income is carried over from the income statement to the cash flow statement exhibited as the top line for operating activities. Investing cash flows coincide with firmwide investments, while financing activities cash flows are derived from equity and debt financing. Finally, the bottom line exhibits the exact amount of cash a company has at the time of reporting.

Financial Statement Analysis

Financial statement analysis of a company's accounts informs both internal and external decision-making based on the overall financial health of an organization as well as its performance and business value. Internally, the financial statements are used for managerial accounting as a planning and monitoring tool. Key for strategic planning, the financial statements can be used to evaluate past, current, and projected performance of a company and its worth.

The three most important techniques applied within financial analysis are the ratio analyses discussed here, and the horizontal and vertical analyses describing the business performance of a firm. Ratio analyses are statistical representations of the relationship between the three main statements and express a company’s financial position. Vertical analysis and horizontal analysis are comparative benchmarking methods of reviewing line-item values across business segments and years.

Here is an overview of the basic financial analyses applied to the three main statements of a company’s financials:

  • Balance sheet analysis of asset turnover, debt to assets, and debt to equity, account receivables turnover, days to sales, and the quick ratio.
  • Income statement analysis of gross profit margin, net profit margin, operating profit margin, tax ratio efficiency, and interest coverage.
  • Cash flow statement analysis calculates net present value with the discounted cash flow (DCF) of a company to estimate solvency over time. The statement is also used to estimate Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA).
  • Comprehensive financial statement analysisReturn on Assets (ROA), Return on Equity (ROE), and DuPont Analysis.

External Financial Reporting Rules

Part of the scope of business practice, external financial reporting ensures there is a well-documented record of a company’s transactions. Externally reported financial statements in conformance with U.S. Generally Accepted Accounting Principles (GAAP) require a company to generate and maintain the main financial statements: the balance sheet, the income statement, and statement of cash flows. Public companies adhere to stricter standards for financial statement reporting, including Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) where applicable. Public companies must also follow GAAP standards for accrual accounting, at times criticized for limiting the transparency of single-item transaction record.

Public companies already listed as initial public offering (IPO) or securitized for the derivatives market are required to publish a complete set of audited annual financial statements by IRS, and Securities and Exchange Commission (SEC) rules. In the U.S., publicly traded companies are required by IRS and SEC rules to submit a Form 10-K and Form 10-Q, every quarter and annually. The information is publicly available to investors with the latest financial reporting of a stock exchange listed company. Publicly traded companies obtain capital from private investors and have a duty to report profit and loss, as well as the value of assets and liabilities, and shareholder dividends paid.

Private companies have more flexibility in preparation of external financial statements, as well as internal preparation of managerial accounting records applying accrual or cash accounting methods. Distinct from the details of the internal managerial accounting report(s), external financial reports are primarily meant for stakeholder review, and therefore do not contain any sensitive information about the operations of a company. Private companies may report with a valuation statement in the interest of going public in the future. External financial reporting also meets the informational requirements for regulatory compliance by private companies, including discharge of liability for transactions performed by way of “pass-through” entities (i.e., partnerships) not registered as corporations.

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Bibliography

“External Financial Reporting.” Accounting Tools 15 Nov 2018. 

“Financial Statement Analysis.”Accounting for Management.org nd

“Internal vs. External Financial Reporting.” Corporate Finance Institute nd

“The Three Major Financial Statements.” Accounting Capital.

Ross, Sean. “What kind of financial reporting requirements does GAAP set out?” Investopedia, 10 May 2019. 

“What are external financial statements?” Accounting Coach nd

 

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