Financial Statements And Annual Reports: Are They Different?
Financial statements and annual reports are essential to all businesses. These are documents that show the financial position and progress of a company. Because these two terms are usually heard in similar contexts, many people often use them interchangeably. However, financial statements and annual reports are not necessarily the same thing.
For one, “annual report” is an umbrella term under which where several kinds of reports fall. Financial statements are one such type of report. In other words, all financial statements are annual reports, but not all annual reports are necessarily financial statements.
To learn more about the difference between these two business terms, read on as this article dives deeper into the natures of financial statements and annual reports.
What are financial statements?
Financial statements are essentially records of all the financial activities of a company. They are structured in such a way as to be easily comprehensible for everyone, especially for the investors, shareholders, and the Accounting and Corporate Regulatory Authority (ACRA) of Singapore.
The main purpose of financial statements is to deliver pertinent information about a company’s financial position, cash flows, and operational outcomes. These pieces of information help the relevant business personalities and departments make wise decisions about the company’s allocation of resources.
Financial statements are generally prepared by the company’s management and audited by an audit company or any outside, independent auditor.
There are four common types of financial statements as follows:
- Income statement – this type informs the relevant audience about the ability of the company to generate profit. It also reveals the volume of sales as well as the nature of the different expenses that the company takes.
- Balance sheet – this type is made to report on the company’s current status as a business. It is used to estimate various business aspects, such as liquidity, debt position, and funding.
- Statement of cash flows – this type shows the nature of disbursements and cash receipts in a company. This is considered one of the most useful types of financial statements since cash flows do not always match expenses and revenues as shown in the income statement.
- Statements of changes in equity – how changes in the interests of the company’s shareholders over time.
What are annual reports?
Annual reports are business documents that are disseminated to the company’s shareholders in order to inform them about the financial condition and operations of the company over the previous year. They provide more detailed information about the company, including its business profile, management team, financial statements, and others.
Annual reports are required to be released after each fiscal year. All listed companies in Singapore are mandated to provide the annual reports to their shareholders at least 14 days before their annual general meeting.
In essence, the annual report of a company serves as its report card. For the investors, reading the annual report helps them make informed decisions as to whether or not it makes sense to continue holding the company’s shares.
An annual report in Singapore usually contains more than 15 sections. The most important sections that can be found in an annual report are as follows:
- Chairman Statement – this section analyses the possible reasons why the company has performed well or poorly. It also explains why the company has taken specific investment or business decisions in the previous year.
- Board of Directors and Management Team – this section lists down all the prominent people in charge at the company as well as their experiences.
- Financial Statements – this section records all the financial activities that the company has taken during the previous year.
- Auditor’s Report – this section reveals who the company’s auditor is. Having an audit firm sign-off on the company’s financial statements signifies the reliability of the information indicated in the annual report.
What is the major difference between financial statements and annual reports?
Annual reports contain much more information than financial statements. Although their primary function is similar – providing relevant information about the company to all of its shareholders – annual reports are considered more comprehensive compared to the latter.
The primary purpose of financial statements is to present the financial position and performance of the company in clear-cut terms and numbers. They are generally transparent and understandable so as to help the shareholders and investors easily understand the changes in the company’s financial position.
The primary objective of annual reports, on the other hand, is to present a broader picture of the company that details more than just mere financial numbers. They usually discuss products, new markets, budding strategies, and the overall direction that the company plans to take in the future. In other words, annual reports go beyond financial data.
Financial statements and annual reports may focus on different scopes and aspects of the business, but they are similarly helpful in helping shareholders and investors make informed decisions concerning the company and the trajectory it should take. Therefore, companies should pay attention to both to be successful.
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