As a business leader, you may need to find a strategy for profitability or make financial allocations for your next business project, which is rich in growth opportunities. How do you make decisions from a more objective perspective? How do you find growth drivers in the data? With accounting reports, you can not only understand the financial health of your organization, but also make informed decisions based on that information. In this article, we’ll introduce you to the three main financial statements: the Balance Sheet, the Consolidated Profit and Loss Account, and the Statement of Cash Flows to help you better understand them:
The balance sheet is a snapshot of a company’s economic position, showing its assets, liabilities, and shareholders’ equity. In accounting, this is like the “financial fingerprint” of a business.
For example, if your company owns an office building valued at HK$10,000,000 (asset), and you owe the bank a mortgage of HK$6,000,000 for it (liability), then your net assets or shareholders’ equity would be HK$4,000,000 (asset – liability).
Here is a simple example of a balance sheet:
|Net assets HK||HK$4,000,000|
Consolidated Profit and Loss Account
The Consolidated Profit and Loss Account, also known as the Income Statement, records information about a company’s revenues, costs, profits and losses over a period of time. In accounting, this is like the “economic activity story” of a business.
Let’s take another example. Suppose your company sold HK$5,000,000 worth of goods in a financial year (revenue) and spent HK$2,000,000 on producing those goods (cost), then your gross profit would be HK$3,000,000 (revenue – cost). If you deduct HK$1,500,000 for operating costs such as rent and staff salaries, then your net profit is HK$1,500,000 (Gross Profit – Operating Costs).
Below is a simple example of a consolidated income statement:
|Rent, staff salary, etc.||HK$1,500,000|
Cash Flow Statement
A cash flow statement records the cash inflows and outflows of a company over a period of time, including changes in cash from operating activities, investing activities and financing activities. In “accounting”, this is like the “cash flow” of a business.
For example, in one month, your company earns HK$500,000 in operating cash flow (income), spends HK$200,000 on new equipment (investing activities), and pays off a loan of HK$100,000 (financing activities). So your net cash increase is HK$200,000 (operating cash flow – investing activities – financing activities).
Here is a simple example of a cash flow statement:
|Operating Cash Flow|
|Purchase of new equipment||HK$200,000|
|Increase in net cash|
It is important to reiterate that the above table only provides the basic structure of a simple financial report. In actual circumstances, it may reveal more about the financial position of the enterprise, including the position of assets and liabilities, the position of revenues and costs, as well as the position of cash flow, etc. The above information is for reference only. The above information is for reference only. If you have any questions or information about tax return (individual tax return, corporate tax return, accountant tax return), we welcome you to contact our professional consultants and provide you with a free quote and consultation service later.