Main financial statements

INTRODUCTION

With this work we will look for the role played by financial statements and explanatory notes in decision making, we will address the following statements such as:

Balance sheet Income statement Statement of retained earnings Statement of cash flow Explanatory notes

In addition, the different functions they fulfill, their definitions and everything related to the financial statements and their explanatory notes.

FINANCIAL STATEMENTS

The primary means of reporting general-purpose financial information to persons outside the business organization is a set of reports called "financial statements." The people who receive these reports are called financial statement users.

A financial statement package comprises four related accounting reports that summarize in a few pages the financial resources, liabilities, profitability and cash transactions of a company. A complete package of financial statements includes:

A “balance sheet” that shows the specific data of the financial position of the company to indicate the resources it has, the obligations it owes and the amount of equity (investment) in the business. An “income statement” that indicates the profitability of the business in relation to the previous year (or another period). A “statement of retained earnings” that explains certain changes in the amount of equity in the business. A “cash flow statement” that summarizes the cash received and the business payments for the same period covered by the income statement.

Additionally, a complete set of financial statements includes many pages of explanatory notes that contain additional information that accountants believe useful in interpreting financial statements.

Investors and creditors often compare the financial statements of many different companies to decide where to invest their resources. For such comparisons to be valid, the financial statements of these companies must be reasonably comparable, this means that they must show similar information. To achieve this objective, financial statements are prepared in accordance with a set of "fundamental rules" called generally accepted accounting principles.

CLASSIFIED FINANCIAL STATEMENTS

Financial statements are designed to assist users in identifying key relationships and trends. The financial statements of most companies are “classified” and presented in a “comparative” way. The word "consolidated" often appears in the state headings. Users of financial statements should have a clear understanding of these terms.

Most business organizations prepare “classified financial statements,” which means that they group or “classify” lines with certain characteristics. The purpose of these classifications is to obtain useful subtotals that will help users in the analysis of these states. These classifications and subtotals are standardized for most companies, a practice that helps decision makers compare the financial statements of different companies.

In comparative financial statements, the values of the financial statements for various years appear in consecutive vertical columns, this helps investors to identify and evaluate significant changes and trends.

Most large companies own other companies through which they carry out some of their business activities. Corporations that own other businesses are called "parents" and the companies they own are known as "subsidiaries." The consolidated financial statements present the financial position and the results of operations of the parent company and its subsidiaries as if they were a single business organization.

CLASSIFIED BALANCE SHEET (annex 1)

In a classified balance sheet, assets are generally presented in three groups:

1. Current assets

2. Fixed assets

3. Other assets

Liabilities are classified into three categories:

1. Current liabilities

2. Long-term liabilities

3. Heritage

CURRENT ASSETS: Current assets are relatively “liquid” resources. This category includes cash, investments in securities (marketable securities), notes receivable, inventories and prepared expenses. To classify an asset as current assets, it must be possible to convert it to cash in a relatively short time, without interfering with normal business operations.

The period in which current assets are expected to be converted to cash is generally one year. However, if a company requires more than one year to complete its normal operating cycle, the duration of the operating cycle defines what current assets are. Therefore, inventory and accounts receivable normally qualify as current assets, even though these assets require more than a year to be converted into cash.

CURRENT LIABILITIES: Current liabilities are existing debts that must be paid within the same period used when defining current assets. These debts are expected to be paid with current assets (or through the services they provide). Current liabilities include documents payable (with a maturity of one year), accounts payable, unearned income and accrued expenses, such as income taxes payable, remunerations payable. On the balance sheet, notes payable generally appear first, followed by accounts payable, the rest of the current liabilities can appear in any sequence.

The ratio of current assets to current liabilities is more important than the total value of any category. Current liabilities must be paid in the near future and the cash to pay these liabilities usually comes from current assets. Therefore, decision makers when evaluating the solvency of a business often share the relative sums of current assets and current liabilities.

INCOME STATEMENTS (Annex 2)

An income statement can be prepared in the multi-step format or in the single-step format. The multi-step income statement is most useful for illustrating accounting concepts and has been used so far.

This income statement is also classified, which means that income and expenses have been organized into various categories.

STATEMENTS OF RESULTS OF MULTIPLE STEPS

A multi-step income statement gets its name from a series of steps whose costs and expenses are deducted from income. As a first step, cost of goods sold is deducted from net sales to determine the gross profit subtotal. As a second step, operating expenses are deducted to obtain a subtotal called "operating profit" (or profit from operations). As a final step, the income tax expense and other “non-operational” items are considered to arrive at net income.

Notice that the income statement is divided into four large sections:

1. Income

2. Cost of goods sold

3. Operating expenses

4. Non-operational lines

Multi-step income statements are notable for their numerous sections and for the development of significant subtotals.

The INCOME SECTION: In a trading company, the income section of the income statement generally contains only one line, called sales. (Other types of income, if any, appear in the final section of the statements.)

Investors and managers are very interested in the trend of net sales. One means of evaluating this trend is often to calculate the percentage change in net sales from one year to the next. A percentage change is the value of the change in a financial measurement, expressed as a percentage; It is calculated by dividing the value of the increase or decrease by the value of the measure before the change occurred. (Changes cannot be expressed as percentages if the value of the statements of financial statements in the previous period is zero or has changed from a negative sum to a positive one).

COST OF GOODS SOLD SECTION: The second section of the income statement of a trading company shows the cost of goods sold during the period. Cost of goods sold generally appears as a single value, which includes incidental items such as freight and normal impairment losses.

GROSS PROFIT: A KEY SUBTOTAL. In a multi-step income statement, gross profit appears as a subtotal. This makes it easier for users of income statements to calculate the company's gross profit margin (gross profit rate).

The gross profit rate is gross profit expressed as a percentage of net sales.

When evaluating the gross profit margin of a particular company, the analysis must consider the rates obtained in previous periods and also the rates obtained by other companies in the same industry. For most trading companies, gross profit rates are generally between 20% and 50%, depending on the type of product sold. Cups generally result in high-turnover merchandise such as groceries, and tall cups are found in brand-name and novelty products.

Under normal conditions, a company's gross profit margin tends to remain reasonably stable from one period to the next. Significant changes in this rate can provide investors with an early indication of a changing consumer demand for the company's products.

OPERATING EXPENSES SECTION: operating expenses are incurred in order to produce income. Expenses are often subdivided into the classifications of selling expenses and general and administrative expenses. The subdivision of operating expenses into functional classifications helps management and other users of financial statements to separately evaluate different aspects of the company's operations. For example, selling expenses frequently increase and decrease directly with changes in net sales. On the other hand, administrative expenses generally remain constant from one period to the next.

OPERATIONAL INCOME: ANOTHER KEY SUBTOTAL: Part of the income and expenses of a business come from activities other than the basic business operations of the company. Common examples are the interest earned on investments and income tax expense.

Operating profit (or profit from operations) shows the relationships between income earned from customers and the expenses incurred to produce this income. In effect, operating income measures the profitability of a company's core business operations and “leaves out” other types of income and expenses.

NON-OPERATING ITEMS: Income and expenses that are not directly related to the main activities of the company's business are listed in a final section of the income statements after determining the operating profit.

Two significant “non-operating items” are the interest expense arising from the way in which assets are financed, not from the way in which these assets are used in business operations. The income tax expense is not included in the operating expenses because the payment of these taxes does not help to produce income. Non-operating income, such as interest and dividends obtained on investments, are also listed in this final section of the income statement.

NET INCOME: Most equity investors consider net income (or net loss) as the most important figures in the income statement. The value represents an overall increase (or reduction) in the owners' equity, resulting from the business activities during the period.

Financial analysts often calculate net income as a percentage of net sales (net profit divided by net sales). This measure provides an indicator of management's ability to control expenses and to retain a reasonable portion of its income as profit.

The "normal" net profit ratio varies widely by industry. In some industries, you can be successful if you make a profit equal to 2% or 3% of net sales. In other industries, net profit can be close to 20% or 25% of net sales profit.

EARNINGS PER SHARE: The evidence of ownership of a company is made up of capital shares. What does the net income of a company mean to someone who owns, say, 100 shares of the capital of a company? To help individual shareholders relate the net income of the company to the ownership of its shares, large companies calculate earnings per share and display these values at the end of their edited results.

In simpler terms, earnings per share is net earnings, expressed in terms of shares.

STATEMENT OF RETAINED EARNINGS (Annex 3)

The term retained earnings refers to the portion of shareholders' equity derived from profitable operations. Retained earnings increase by earning net earnings and are reduced by incurring net losses and by declaring dividends.

In addition to the balance sheet, income statement, and cash flow statement, a complete set of financial statements includes a "statement of retained earnings."

PREVIOUS PERIOD ADJUSTMENT: Occasionally a company may discover that a material error was made in the measurement of net income in a previous year. Since net income is closed in the retained earnings account, an error in reported net income will cause an error in the value of retained earnings that appears on all subsequent balance sheets. When such errors come to light, they must be corrected. The correction, called “prior period adjustment,” is shown in the statement of retained earnings as an adjustment to the balance of retained earnings at the beginning of the current year. The value of the adjustment is shown net of any income tax effects.

Prior period adjustments rarely appear in the financial statements of large public limited companies. The financial statements of these companies are audited annually by auditors and it is not probable that they contain material errors that may later require correction for adjustments for previous periods. Such adjustments are much more likely to appear in the financial statements of those companies not required to be audited.

RESTRICTION ON RETAINED EARNINGS: Some portion of the retained earnings may be restricted due to various contractual agreements. A retained earnings “restriction” prevents a company from declaring dividends that reduce retained earnings below a designated level. Most companies disclose earnings retention restrictions in the accompanying notes to the financial statements.

STATEMENT OF CASH FLOWS (Annex 4)

The statement of cash flows is included in the basic financial statements that companies must prepare. This provides important information for business managers and arises in response to the need to determine the outflow of resources at a given time, as well as a projective analysis to support decision-making in financial, operational, administrative and commercial activities.

Definition:

The statement of cash flows is the basic financial statement that shows the cash generated and used in operating, investing and financing activities. It must be determined for its implementation, the change of the different items of the Balance Sheet that affect cash.

General objective:

The objective of this statement is to present pertinent and concise information, relative to the collections and disbursements of cash of a company during a period so that the users of the financial statements have additional elements to examine the capacity of the entity to generate future cash flows., to evaluate the ability to meet its obligations, determine internal and external financing, analyze the changes presented in cash, and establish the differences between net income and collections and disbursements.

CASH FLOWS ARE NOT “ACCOUNT BALANCES”: The statements of cash flows in the financial statement are identified by descriptive titles, rather than by the account name of the ledger. Most companies design their roster of accounts to measure income and expenses, rather than cash flows. Although the different types of cash flows are not recorded in separate accounts from the ledger, this can easily be calculated at the end of the accounting period.

To meet the general objective, the variation that cash has had during the period must be clearly shown in relation to the activities of:

Operation: Those that affect the results of the company, are related to the production and generation of goods and the provision of services. Cash flows are generally the consequence of cash transactions and other events that enter into the determination of net income.

Investment: They include the granting and collection of loans, the acquisition and sale of investments and all operations considered non-operational.

Financing: determined by obtaining resources from the owners and the reimbursement of returns. All changes in liabilities and equity other than operating items are considered.

The effects of investing and financing activities that change or modify the financial situation of the company, but that do not affect the cash flows during the period must be disclosed at the time. Additionally, a reconciliation between net income and cash flow must be presented.

OPERATING CASH FLOWS

TICKETS:

Collection of sales for goods or provision of services. Collection of accounts receivable. Collection of interest and investment income. Other collections not originated with investment or financing operations.

DEPARTURES:

Cash disbursement for the acquisition of raw materials, inputs and goods for production. Payment of short-term bills. Payment to creditors and employees. Payment of interest to lenders. Other payments not originated with investment or financing operations.

INVESTMENT CASH FLOWS

TICKETS:

Collection from the sale of investments, property, plant and equipment and other fixed assets. Short-term or long-term loan collections, granted by the entity. Other charges related to investment or financing operations.

DEPARTURES:

Payments to acquire investments, property, plant and equipment and other fixed assets. Payments in the granting of short and long-term loans. Other payments not originated with investment or financing operations.

FINANCING CASH FLOWS

TICKETS:

Cash received for increases in contributions or relocation of contributions. Loans received in the short and long term, different from transactions with suppliers and creditors related to the operation of the entity. Other cash inflows not related to operating and investing activities.

DEPARTURES:

Dividend payments or their equivalent, depending on the nature of the economic entity. Refund of cash contributions. Reacquisition of cash contributions. Short and long-term obligations payments other than those originated in operating activities. Other payments not related to operating and investment activities.

NET CASH FLOWS: This refers to a category of cash inflows less any related cash outlay. The cash flow statements include subtotals and show the cash flow for each category of business activity.

RELATIONSHIP BETWEEN CASH FLOWS AND THE BALANCE SHEET: the last three lines of the statement of cash flows reconcile the net cash flow for the period with the cash values that appear on the company's balance sheet. This reconciliation is a “proof” that the cash flow statement fully explains the change from one balance sheet date to the next, in the value of the cash held.

CRITICAL IMPORTANCE OF CASH FLOWS FROM OPERATIONAL ACTIVITIES: For a business to survive in the long term, it must generate a positive net cash flow from its operating activities, they will not be able to obtain cash indefinitely from other sources. Creditors and shareholders quickly tire of investing in companies that do not generate positive cash flows from business operations.

As the net cash flow from operating activities remains after the payment of ordinary expenses and operating liabilities, it is considered a key measure of liquidity.

CASH FLOWS FROM INVESTMENTS AND FINANCING ACTIVITIES: It is not important that net cash flows from investing and financing activities be positive in a given year. In fact, many successful businesses generally report negative net cash flows for these activities.

Fixed asset purchases require cash outlays. Consequently, growing companies generally report negative net cash flows from their investing activities.

Large financial transactions (borrowing, issuing equity shares, or paying off a large loan) occur infrequently. Many companies do not present this type of transaction every year. When they do, a single transaction is likely to determine whether the cash flow from financing activities for the entire year is positive or negative.

However, many successful corporations pay dividends on a regular basis. In the absence of other financial transactions, dividend payments cause many successful companies to report negative net cash flows from their financial activities.

WHO USES THE INFORMATION ON CASH FLOWS?

The statement of cash flows is used by outsiders (investors and creditors) mainly to evaluate the solvency of a business. By studying the statements of cash flows for a series of years, they gain insight into such matters as:

Is the company becoming more or less solvent? Do operating activities consistently generate enough cash to ensure prompt payment of operating expenses, maturing liabilities, obligations, and dividends? Do operating activities also generate enough cash to fund growth and / or create an equivalent of increases in dividends paid to shareholders? Is the company's ability to generate cash from operational activities improving or deteriorating?

In the short term, solvency and profitability must be independent of each other. In other words, even a profitable business can run out of cash and become insolvent. On the other hand, an unprofitable business can remain solvent for years if it has a lot of resources or borrowing capacity. When evaluating the future prospects of any business organization, equity investors must assess both the profitability of the business and its creditworthiness. Creditors, especially short-term creditors, often place greater importance on solvency than profitability.

MANAGEMENT INTEREST IN CASH FLOWS

Among decision-makers, no group is more interested in a company's cash flows than management. Management is responsible for keeping the business solvent and using resources effectively. Cash budgets are accounting reports specifically designed to help management meet these responsibilities.

NOTES TO THE FINANCIAL STATEMENTS

The notes to the financial statements represent the disclosure of certain information that is not directly reflected in those statements, and that is useful for users of financial information to make decisions on an objective basis. This implies that these explanatory notes are not in themselves a financial statement, but are an integral part of them, their presentation being mandatory.

The notes must be delivered on legal-size sheets (duly identified with the name of the company), attached to the financial statements, in order to guarantee the ease of handling and subsequent filing of said documents.

This is the minimum information that must be provided in the explanatory notes; however, it is necessary to clearly specify that the information requirements established by the Superintendency do not exempt the company administration from the responsibility of disclosing all essential information. It is clear that the Superintendency cannot establish a priori the information that the company must disclose in each particular case, and that is why the law gives responsibility for this concept to those who can best carry it out, that is, the administrators of the company. society.

The explanatory notes to the financial statements refer to the figures for the current period as well as the comparative figures presented with respect to the previous period, monetarily corrected, and therefore, all the notes must include the information required for both periods presented.

Special care must be taken in the drafting and presentation of the explanatory notes to the financial statements, in order to ensure that they will be easily understood and interpreted.

The order of the explanatory notes described below is optional, except for the first three, which must precede the rest of the set.

In order to establish minimum submission criteria, the following guideline is provided:

Registration in the securities registry: it should be noted in this note that the company is registered in the Securities Registry and under the supervision of the Superintendency.

Accounting criteria applied: this note will include a description of the accounting criteria applied. This description will refer fundamentally to the selection of an accounting criterion when there are several acceptable alternatives, to particular criteria of the industry in which the company operates, and to standards that have a significant effect on the financial position and operating results.

These include the following:

Period covered by the financial statements if it is different from one year; Conversion bases (when there are transactions or financial statements in foreign currency); Methods used in the depreciation of fixed assets; Inventory valuation methods and cost systems; Methods of amortization of all significant non-monetary assets; Investment valuation criteria;

Accounting changes: any change in the application of accounting principles should be noted, indicating at least: the nature of the change, justification for doing so, its effect on results and on other items in the financial statements.

Monetary correction: the monetary correction of the main assets, liabilities and equity, as well as any other relevant antecedent in this regard, must be indicated.

Inventories: this note should indicate the composition of the inventory item, such as: finished products, products in process, raw materials, etc.

Investments and marketable securities: this note should indicate any other relevant information that complements the "Investment statement", such as: significant differences between the economic and / or market and accounting value of the investments, special situations that may affect to subsidiaries, associates, and other related entities, etc.

Provisions and write-offs: a detail must be clearly shown with the amount and concept to which each of the provisions for the year corresponds. At the same time, the significant penalties that occurred during the period should be detailed.

Obligations with banks and financial institutions in the short and long term, debt with the public, accounts payable, documents payable, various creditors, accounts payable to related companies and other short and long-term liabilities: must be provided in this explanatory note an adequate disclosure of the main liabilities indicated in the title, ordered by maturity date. In the case of convinced liabilities of more than one year term, these must be shown grouped by years of maturity. In the case of obligations with banks and financial institutions, these must be individualized by the amount owed to the main creditor institutions, of the same indicated above.

Income tax: the provision for the year and the amount covered with provisional payments must be included, the amount of tax losses that can be used in the future classified by the years in which they expire, the tax rate if the company has a franchise, etc.

In addition, the amounts recorded for deferred taxes must be indicated in this note.

Compensation for years of service to personnel: the bases for calculating the provision, the accounting criteria, the expenses and payments for the year, etc., must be indicated.

Contingencies and commitments: in this note the memorandum accounts are replaced, special reference should be made to: amount of guarantees granted, lawsuits or similar contingencies that have not been recorded at the balance sheet date, mortgages and the like, amount of guarantees granted and any liabilities Indirect contracted by the company, commitment for investments in assets and their financing.

Guarantees obtained from third parties: this note should refer to the main guarantees, bonds, etc. received from third parties in favor of the company to guarantee obligations contracted for the purchase of assets, money credit operations, etc. The relationship between the reporting company and the grantor of the guarantee or surety must be expressly stated.

Foreign Currency: this note should include an adequate disclosure of assets and liabilities in foreign currency, the respective exchange rates used, variation of the year, and any other relevant information in this regard.

Changes in equity: it should be clearly established in this note, the variations experienced by each of the capital accounts, reserves and profits that make up the equity of the company. Likewise, the concept for which the variation occurred, ie; capital increases during the year, capital appreciation, declared dividends, etc.

It must also be expressly indicated if there are restrictions on the payment of dividends.

Transactions with related entities: transactions with related entities and also transactions with related natural persons, such as shareholders, directors, administrators and / or liquidators where appropriate, etc., must be adequately disclosed in this note, indicating the nature, volume and effect of these transactions on the results of the year; The balances represented in the balance sheet with related entities or persons must be disclosed, indicating the name of the entity or related person, nature of the relationship, amounts and maturity terms, in accordance with the provisions of Circular No. 109, dated 14 December 1982, or the one that replaces it. In the absence of transactions with related entities, this must be expressly mentioned.

Board remuneration: this note must detail all remuneration that the directors have received from the company, during the year covered, including those that come from functions or jobs other than the exercise of their position, or for representation expenses, travel expenses, royalties and, in general, any other stipend.

Share transactions: the purchases and sales of capital shares carried out during the fiscal year by the president, directors, administrators or liquidators, as the case may be, and account inspectors must be indicated. The transactions carried out by the majority shareholders (as defined in article 12, law No. 18,045) of the company must also be indicated (see Circular No. 109, of December 14, 1981).

Sanctions: the sanctions applied during the period by the Superintendency, whether these were against the directors, administrators, or the company itself, as well as their origin, must be established in this note.

Subsequent events: includes all significant events of a financial nature or of any other nature, which occurred between the end of the year and the date of presentation to the Superintendency of the financial statements, such as: significant fluctuations in fixed assets, significant exchange variations, significant variations in company operations, changes in the board of directors and / or the main executives, significant variations in any market condition, etc. Any significant commitment that the company has acquired directly or indirectly in the mentioned period should also be included in this note. In the absence of subsequent events, this must be expressly mentioned.

IN ADDITION TO THE NOTES TO THE FINANCIAL STATEMENTS MENTIONED ABOVE, ALL THOSE THAT PROVIDE SUFFICIENT INFORMATION TO UNDERSTAND AND INTERPRET THEM SHOULD BE INCLUDED.

CONCLUSION

Financial statements are very necessary for decision-making by organizations external to the company and for the management itself, since without these the financial position of the company would not be known and this allows new investors to come to the company to invest.

In addition, the explanatory notes, not being a financial statement, are very necessary because it provides an explanation of the different procedures that were carried out to arrive at those financial statements.