5 Key Financial Statements: Understanding Your Business’s Health

Understanding the importance of your business financial statements are essential for any business, particularly in Indonesia, where complex regulations and evolving standards can challenge companies of all sizes. Accurate financial reporting may help businesses maintain compliance, secure funding, or make informed strategic decisions. 

In this guide, we’ll demystify the critical components of financial statements in Indonesia, providing clear insights into balance sheets, income statements, and cash flow reports. 

Whether facing regulatory hurdles or trying to streamline your financial processes, this guide will equip you with the knowledge to navigate the financial landscape confidently.

What is a Financial Statement?

Financial statements are documents companies prepare that outline their financial performance and condition. Government bodies and accountants frequently review these statements to verify their accuracy, and they are crucial for purposes such as taxation, securing financing, or making investment decisions.

For-profit businesses typically produce four primary financial statements:

• The balance sheet
• Income statement
• Statement of cash flows
• Statement of changes in equity

Non-profit organizations use similar statements with different names and slightly altered content to reflect their specific financial reporting needs.

What are the 5 Types of Financial Statements?

Five types of business financial statements should be aware of. Being familiar with this list of financial statements helps you keep your business finances organized and empowers you to make smarter, data-driven decisions for the future.

Balance Sheet

The balance sheet, commonly known as the statement of financial position, summarizes a company’s assets and liabilities after a reporting period. As a standard financial statement example, it is organized according to the following formula:

Assets = Liabilities + Shareholders’ Equity

This equation ensures that a company’s resources (assets) are balanced with the claims against those resources, helping stakeholders assess the business’s financial stability and solvency.

Income Statement

The income statement outlines a company’s financial performance over a specific period, detailing revenue, expenses, and profit. It is also known as a profit-loss statement or earnings statement. The statement includes:

• Revenue generated from sales of goods and services.
• Expenses incurred to earn that revenue and manage the business.
• Net income or profit remaining after deducting expenses.
• Profit and loss from non-operational activities

Beneath International Financial Reporting Standards (IFRS), companies must also present a statement of comprehensive income alongside the income statement.

Cash Flow Statement

The cash flow statement, also known as the statement of changes in financial position, monitors the company’s cash flow and cash equivalents over a specific period. Cash equivalents refer to short-term, highly liquid investments that can be transformed into cash, typically within three months.

Statement of Retained Earnings

The statement of retained earnings shows the total earnings retained in the business after distributing dividends or making other shareholder payments. It details changes in retained earnings from the beginning to the end of each reporting period and may include adjustments from transactions with related parties. 

Under IFRS, a statement of shareholder equity changes is also required.

Notes to the Financial Statements

The notes to the financial statements offer extra context and clarifications to help understand the financial reports. These notes typically include:

1. Accounting Policies and Estimates

• A clear explanation of the accounting principles and judgments used to prepare the financial statements.
• Details on significant estimates and their potential impact on the financial figures.

2. Detailed Line Item Disclosures

• Segment Reporting: A breakdown of revenue, expenses, and assets by business segment or geographical region.
• Accounts Receivable and Payable: A detailed analysis of the aging of receivables and payables, including any significant allowances for doubtful accounts.
• Long-Term Assets: Information on the acquisition cost, accumulated depreciation, and amortization methods for property, plant, and equipment, intangible assets, and other long-term investments.

3. Critical Disclosures

• Financial Instruments: A comprehensive overview of the entity’s exposure to financial risks, such as credit risk, market risk, and liquidity risk.
• Debt Covenants: Disclosure of any covenants or restrictions imposed by lenders or creditors, including any potential breaches or waivers.
• Contingent Liabilities: Information on potential liabilities that may arise from future events, such as lawsuits or guarantees.
• Acquisitions and Investments: Details on significant acquisitions, mergers, and strategic investments, including their impact on the financial statements.
• Basis of Accounting: Whether the financial statements are prepared on a cash basis or an accrual basis, and the specific accounting standards followed (e.g., IFRS, GAAP).

How Financial Statements Work

Financial data from a business is examined by both internal and external parties to assess its performance and forecast potential stock price movements. The annual report consists of the company’s financial statements and is a crucial source of accurate and audited financial data.

Investors, market analysts, and creditors rely on a company’s financial statements to assess its financial health and earning potential. The three critical financial statements are the balance sheet, income statement, and cash flow statement.

READ MORE:

• How to File Your Companies Financial Statements in Indonesia?
• Financial Service Providers in Indonesia are Required to Handle Customer Complaints
• The Business Trend of Financial Technology in Indonesia

Benefits of the Financial Statement

Preparing and utilizing financial statements provide various benefits for the business, which can be seen in the below list:

Assessing Financial Health

Financial statements help businesses assess profitability, liquidity, solvency, and efficiency by analyzing critical documents like the income statement and balance sheet. This financial statement analysis highlights strengths, weaknesses, and areas for improvement.

Informed Decision-Making

Financial statements provide crucial data for stakeholders to make informed decisions about investments, capital allocation, pricing, and expansion.

Building Stakeholder Trust

Financial reports communicate a company’s financial status to stakeholders, promoting transparency and trust.

Ensuring Regulatory Compliance

Accurate financial statements ensure compliance with laws and regulations, helping businesses avoid penalties and maintain accountability and credibility.

Securing Investments and Loans

Strong financials attract investors and lenders by showcasing a business’s financial health and growth potential, improving chances of securing favorable terms.

Benchmarking Against Competitors

Financial reports allow businesses to compare their performance with that of their industry peers, identifying areas for improvement and opportunities to boost efficiency.

Supporting Financial Planning

Maintaining accurate records enables businesses to forecast and budget effectively, guiding strategic growth and resource allocation.

Streamline Your Financial Management with InCorp

Using financial statements offers numerous benefits for businesses, including ensuring long-term continuity by providing a clear view of economic health. Accurate and up-to-date financial statements also help mitigate risks and prepare businesses for various scenarios.

To support this, InCorp Indonesia (an Ascentium Company) offers financial and operational resilience services to safeguard your business’s financial well-being, even during force majeure events.

Additionally, we aim to streamline your business processes by offering comprehensive services such as accounting, payroll, and tax consulting, helping you focus on growth and stability.

Fill out the form below to streamline your financial management in Indonesia hassle-free.