End-of-Year Financial Statements

Purpose of End-of-Year Financial Statements

Provide financial overview: End-of-year financial statements present a snapshot of a company’s financial health at the end of a specific accounting period.
Aid informed decision making: They enable shareholders, lenders and other interested parties to make informed decisions regarding their relationship with the company.
Assist in strategic planning: Top management refers to these statements for strategic planning and goal setting.
Fulfill legal requirements: Public limited companies are legally obligated to prepare and publish these statements.

Balance Sheet: This statement provides an overview of a company’s assets, liabilities, and shareholders’ equity at the end of the financial year.
Profit and Loss Account: This document outlines the revenues, costs, and expenses incurred during the financial year. It helps to calculate the net profit or loss of the company.
Cash Flow Statement: This statement highlights the company’s cash inflows and outflows during the financial period and helps to understand its liquidity position.
Statement of Changes in Equity: This statement records changes in the company’s equity throughout the year due to actions like issued shares, dividends paid, and net profit/loss.

Use the double-entry bookkeeping system: Every financial transaction impacts at least two accounts. For instance, if a company purchases machinery for £5000, it would reduce the cash account by £5000 and increase the machinery account by the same amount.
Follow the accrual principle: Record revenues and expenses when they are earned and incurred, respectively, not when the cash is received or paid.
Ensure compliance with accounting standards: The financial statements should be prepared in accordance with the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), as applicable.
Seek auditor’s opinion: An independent auditor reviews the financial statements to certify their accuracy, which increases trust among stakeholders.

Company valuation: Investors use these statements to value the company and decide whether to buy, hold or sell its shares.
Creditworthiness: Lenders assess these statements to determine the company’s ability to repay a loan.
Strategic Planning: The company uses these statements to identify trends, performance measures and areas of concern, helping in future business planning.