Understanding Key Financial Terms and Statements for Businesses
Key Financial Terms and Statements
Heritage
Heritage is the representation of all goods and rights that a company has to do its business, as well as payment obligations it has with others. It is formed by what the company has and what it expects to charge, minus what the company owes. Net worth is the residual part of the assets of a company after deducting all its liabilities, in addition to the contributions of partners or owners and the cumulative results from earlier periods. Assets are the sum of goods and rights of value that a company has. Liabilities reflect the financial structure, the origin of the means or financial resources, and sources of financing, whether they are the company’s own or others.
Inventory
An inventory is an accounting statement at a specific time, which details all elements of heritage with their own characteristics and composition: rights in goods and assets, and liabilities.
Annual Financial Statements
Annual financial statements include the balance sheet, income statement, statement of changes in net worth, statement of cash flows, and the notes to the financial statements. All form a unity with the aim of showing an accurate picture of the heritage. They report the financial situation and results of the company. The content and structure of these financial statements or accounting are normalized to give information to interested persons on the progress of the company. Companies must file these statements with the commercial register where the company is domiciled within four months following the close of the fiscal year. This information may be of interest to shareholders, partners, creditors, employees, and competitors.
Balance Sheet
A balance sheet groups assets and liabilities into economic masses without detailing their composition or characteristics. It is made at a particular time, and the accounts are ordered as follows: assets (from highest to lowest liquidity) and liabilities (from lowest to highest enforceability).
Profit and Loss Account
The profit and loss account is an accounting document that reports the result obtained in a period of time and the causes that are causing it, reflecting income and expenses incurred by the company. The result can be calculated as follows: Income + Expenses = Profit (or vice versa = Loss).
Statement of Changes in Net Worth
The statement of changes in net worth is a new general accounting plan. Its purpose is to report on the changes in net worth derived from: the result of the period, the amount of income or expenditure charged to the net worth, and changes in the net worth from operations with partners or owners.
Notes to the Financial Statements (Memory)
The notes to the financial statements, also known as the memory, are a compulsory annual account at the end of the financial period. Its function is to complement, extend, and comment on balance sheet information and the profit and loss account. Therefore, these figures give us information that must be interpreted to understand the overall business situation.
Fund Moves
Fund moves can be understood in two ways: as the part of the assets that are not funded with current liabilities, but with fixed liabilities, or as the part of fixed liabilities that are not financed by fixed assets, but by current assets. It should be positive; otherwise, it may indicate suspension of payments and financial imbalances.
Profitability
Profitability is the company’s capacity to produce profits. It is the benefit obtained by linking the resources used, measured as a percentage.
Benefit
Benefit is the result of income over expenditure in the profit and loss account. There are two types of benefits: economic benefit, generated by company assets, and net benefit, which is ultimately for the owners or shareholders.