Good financial statements empower your company to make better strategic decisions, but how do you know if your financial statements are good? If they're not, how do you make them better? Some basic principles separate the good from the bad, but your financial statement quality also depends on how well suited it is to your audience.
This blog is the second of a three-part series on how to create better financial statements:
Part 1:6 Elements of a Good Financial Design Statement
Part 2: Formatting Best Practices for Financial Statements
Part 3: Data Visualizations for Financial Statements
What makes a financial statement useful?
FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
Relevance
Information is relevant if it is capable of affecting users' decisions, either because it helps them predict future business conditions or because it provides feedback on prior predictions. Irrelevant information takes up valuable report space and may confuse users.
Faithful Representation
To faithfully represent information, it must be complete, unbiased, and error-free. Perfectly faithful representation is rarely possible but try to get as close as you can.
Comparability
Information is more useful when it can be compared with similar information about another entity or with similar information about the same entity from a different time period. Being consistent about how you format your reports and what information you include will help with their comparability.
Verifiability
Information is verifiable if different knowledgeable and independent observers could reach a consensus that the information is faithfully represented. Verifiability gives users confidence about the accuracy, completeness, and neutrality of the information.
Timeliness
Information needs to be available to decision-makers in time to be capable of influencing their decisions. Older information can still be timely if it allows users to identify and assess trends.
Understandability
Information should be clear and concise and fit the audience's knowledge level.
Sometimes it is not possible to meet all of the above criteria at once. For example, you may spend so much time ensuring that the information on a report is complete that it ceases to be timely. Good report writing requires you to find an acceptable balance between conflicting goals.
Matching your reports to your audience
There are two main types of reports: financial reports and management reports. Which one you choose depends on your audience.
Financial reporting
Financial reports are aimed at external users who need to make decisions regarding your company, such as whether to invest or to extend a line of credit. They are more formal in structure and content because they must follow GAAP rules. Since all companies follow the same structure and content rules, it is easier for users to compare two companies' reports.
Management reporting
Management reports are aimed at internal users who need to make decisions on the company's behalf. Since these reports are not seen by outsiders, you can provide more in-depth information without giving away proprietary information. You do not need to follow the strict structure and content rules that apply to financial reports, but you should still ensure your reports meet the FASB qualitative characteristics. While you have more freedom when creating management reports, you also have to make more decisions and therefore have more room for error.
How ActivReporter makes your reports better
ActivReporter'sdrilldown feature allows authorized users to obtain detailed information about the individual transactions that make up the big picture numbers, while published reports provide the necessary information to external users without giving away non-public information.
Report templates allow you to quickly create consistent, up-to-date financial reports, while the native excel features make it easier to create any management report imaginable. ActivReporter'ssecurity permissions allow you to tightly control which members of your organization can see which pieces of information.
During our series on how to create better financial statements we've shared some best practices for formatting both types of reports, looked at various data visualizations, and in this blog, discussed FASB's qualitative characteristics of useful financial information, and the differences in purpose between financial and management reporting. Now you should be ready to present your financial designs to your team!
FAQs
What makes a financial statement useful? FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
What are the 6 qualitative characteristics of financial information? ›
The two fundamental qualitative characteristics of financial reports are relevance and faithful representation. The four enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability.
What are the elements of a good financial statement? ›
There are five elements of a financial statement: Assets, Liabilities, Equity, Income, and Expenses.
What are 5 elements of financial statements? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
What are the components of financial statements? ›
Financial statements can be divided into four categories: balance sheets, income statements, cash flow statements, and equity statements.
What are the qualitative characteristics of accounting information briefly explain 6? ›
If financial information is to be useful then it must be relevant and must also faithfully represent what is being reported. The usefulness of this information is enhanced if it is comparable, verifiable, timely and understandable. Each of these qualitative characteristics will be considered below.
What is a financial statement and its characteristics? ›
A financial statement is like the GPS of an organization- one that provides you with a picture of its financial performance The documents can reveal a company's true health and trajectory. They provide a comprehensive snapshot of an enterprise's financial activities and position.
What are the key elements of the statement of financial position? ›
The overall aim of a balance sheet is to get the assets and capital employed to match, thus balancing the sheet. There are several key elements on a statement of financial position. These include assets, liabilities, working capital (net current assets), and capital employed.
What should be included in a financial statement? ›
The line items in a financial statement will vary from one corporation to the next, but the most common among them are revenues, costs of goods sold, taxes, cash, marketable securities, inventory, short-term debt, long-term debt, accounts receivable, accounts payable, and cash flows from investing, operating, and ...
What are the basic types of financial statements? ›
The 4 types of financial statements
- Balance sheets.
- Income statements.
- Cash flow statements.
- Statements of shareholders' equity.
Statement of financial position (balance sheet); Statement of income and expense (profit and loss account); Statement of cash flows (cash flow statement); Statement of changes in equity; and.
What is the most important financial statement? ›
The income statement will be the most important if you want to evaluate a business's performance or ascertain your tax liability. The income statement (Profit and loss account) measures and reports how much profit a business has generated over time.
What are the elements of finance? ›
Most financial management plans will break them down into four elements commonly recognised in financial management. These four elements are planning, controlling, organising & directing, and decision making.
What are 3 main financial statements? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are the five components of financial statements considered by an auditor? ›
What are the Components of Financial Statements?
- #1 – Balance Sheet. Assets. Liabilities. Owners Equity.
- #2 – Income Statement.
- #3 – Statement of Changes in Equity.
- #4 – Cash Flow Statement.
Your financial plan should include seven key elements (which we will cover in more detail below): your profit and loss statement, operating income, cash flow statement, balance sheet, revenue projection, personnel plan, as well as your business ratios and break-even analysis.
What are the 5 qualitative characteristics of financial information according to IASB? ›
The chapter explains the fundamental qualitative characteristics (relevance and faithful representation) and the enhancing qualitative characteristics (comparability, verifiability, timeliness, and understandability) of useful financial information and notes the cost constraint.
What are the qualitative characteristics of financial information quizlet? ›
Comparability, verifiability, timeliness, and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.
Which of the following items are qualitative characteristics of financial information? ›
The qualitative characteristics of financial information include: Relevance. Faithful Representation. Comparability.
What are the quantitative characteristics of financial statements? ›
Quantitative Characteristics of Financial Statements
Quantitative financial data include numbers you can measure, such as revenue, expenses, profit margins and taxes. You can break down these numbers to further quantify areas of your financial performance.
