A number of business compliance issues in recent history have meant the introduction of tougher global accounting standards.
These standards are being introduced for larger corporations but in time, they filter down to small businesses around the world. The accounting standards are known as the International Financial Reporting Standards or the (IFRS).
When we start to try to get a better understanding of financial reporting our focus should be on understanding the various reports and interpreting the information that they contain. The running of a business is an entirely different thing altogether.
Financial reports come in many different forms and can include the following financial statements. Profit and loss, cash flow forecasts, balance sheets and depreciation schedules. This is just to name a few.
What does a balance sheet show us?
Balance sheets show us a list of the businesses assets and it’s liabilities and this helps us calculate what the business is really worth. The assets minus the liabilities provide us with the businesses equity position, which is just a fancy way of saying the real value of the business.
What is a depreciation schedule?
Depending on where in the world you live, these will have slightly different names. But if you imagine a depreciation schedule as being a list of all of the businesses assets that are used in the running of a business like cars ,equipment, computers and the like. Then take the list of these current assets and begin the look at how long they will last and the way there value will decline to the business.
Different government tax departments around the globe have different calculations that they allow businesses in their individual jurisdictions’ to apply.
After listing the assets, a business can then depreciate each item over its valuable life.After calculating what the written down value of each asset is each item gets listed in the assets section of the balance sheet.
After that is done, the new calculated value and the depreciation that has been applied can be shown in a business profit and loss statement.
What is a Cash Flow Statement?
This financial report is probably the most important statement if a business is being sold regardless of how large or small the company is.
The cash flow statement will show if a company is generating enough cash flow, to continue trading for one to Four years. If someone is considering the purchase of take over of a business they will want to determine this fact and the projection for the period they deem critical. Naturally, there are many factors to take into consideration including the type of business being accessed and the time cycle of the product or service, they offer.
Cash Flow statements are important to a business when they want to borrow funds to grow the business. If an institution was lending money to individuals or a business to buy business lenders, they analyse the cash flow reports very closely.
Lenders, purchasers and financial advisors can open themselves to potential litigation if they do not access cash flow viability.
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