Financial statements include key documents like the income statement, the statement of shareholders' equity and the balance sheet that provide information on business finances. Companies use these to make many operational decisions, while investors use them to examine businesses and industries from the outside. Reformulation refers to making the financial statements for a particular period, then changing them, reorganizing the items they contain in order to more accurately depict various aspects of the business.
One of the primary reasons that businesses choose to reformulate financial statements is for readers, both inside and outside companies. Normal statements are created using generally accepted accounting principles, but these do not always show the most accurate representation for analysis. The business may be able to make the statements much easier to read and highlight the most important information by reformulating them for specific readers, creating their custom versions.
When it comes to the balance sheet, many businesses will reformulate to further divide liabilities and assets. Liabilities especially can benefit from being divided in detailed categories like financial liabilities and operating liabilities. This shows what expenses are associated with operation and which are more oriented toward investment, future plans and expansion. Some businesses may also want to separate assets to show which have come to the business in recent years.
Identify Surpluses and Deficits
In the income statement, reformulating can help highlight recent changes that led to extra income or a lower income than previously reported. This is often connected with shareholder changes. For instance, if shareholder equity changes or if a dividend distribution has been made, the business may reformulate the income statement to incorporate the change and produce a new net income, giving readers a more accurate picture of the period.
Equity can also change for the business. When dealing with the state of shareholders' equity, it may be easier to show beginning and ending equity balances with a reformulation, taking into account any major share changes and showing clearly the earnings available to stockholders together with net distributions.