An annual report complies with legal requirements by providing shareholders and regulatory authorities with a detailed account of an organization’s operating and financial performance over its accounting year. An annual report for a corporation normally includes four types of financial statement: a balance sheet, income statement, cash flow statement; and equity statement, also known as statement of retained earnings.
A balance sheet is a summary of an organization’s financial position. According to Quick MBA, a balance sheet is useful for evaluating an organization’s ability to meet its long-term financial commitments. A balance sheet lists all the assets that an organization owns, together with its liabilities, and the equity owned by various stakeholders. Assets take two forms: current assets, which include cash, accounts due for payment and securities that can be easily converted to cash; and fixed assets, such as buildings, equipment or land. Liabilities include taxes, wages, accounts due for settlement and interest. Equity represents the value of stock owned by stockholders or business owners.
An income statement summarizes the amount of money an organization earned and the amount it spent during the accounting year. Earnings derive from the revenue an organization achieves from the sale of products or services, plus any capital gains. Expenditure refers to the money an organization spends to create revenue, such as materials, running costs and cost of sales. Deducting expenditure from revenue provides a figure of net income.
Cash flow statements describe where an organization acquired cash during the accounting period and how it used the cash during the same period. This statement shows the changes in cash flow over a period and helps to identify any problems an organization might face in meeting its commitments according to the U.S. Securities and Exchange Commission. The cash flow statement analyzes cash transactions by three categories: operating activities, investing activities and financing activities. The category of investing activities refers to cash transactions in buying or selling assets; financing activities includes bank loan, funding through stock transactions and other forms of credit.
The equity statement, or statement of retained earnings, explains changes in the amount of money an organization retains in the business. The statement shows the owners’ or shareholders’ equity at the beginning of the period, any investments in the business and the net income for the accounting period. It also lists any dividends the organization paid to shareholders to arrive at the closing equity figure.