Definition of Financial Statements

Financial statements are organized accounting data that reflect the financial performance and economic position of an entity for a specific accounting period. They serve as essential tools that enable shareholders, investors, and related parties to make informed investment and financial decisions through reliable and accurate accounting information.

Objectives of Financial Statements

Financial statements aim to achieve several fundamental objectives that serve the needs of various interested parties, most notably:

• Showing Financial Position: Comprehensive presentation of the company's assets, liabilities, and equity at a specific point in time, demonstrating the company's financial strength and ability to meet its obligations
• Measuring Financial Performance: Determining profitability levels by measuring revenues, expenses, and net profits, and evaluating the company's efficiency in using its resources to generate returns
• Supporting Decision Making: Providing reliable and useful information for investors, creditors, and analysts to make informed investment and credit decisions
• Management Accountability: Showing how management uses the company's various resources and ensuring proper handling of shareholders' funds
• Predicting Cash Flows: Helping users anticipate the company's ability to generate future cash flows and determine the timing and uncertainty of these flows
• Risk Assessment: Identifying the level of financial and operational risks facing the company, and evaluating its ability to deal with changing economic conditions

Types of Basic Financial Statements

Financial statements consist of several basic and interconnected reports, each with a specific purpose in presenting financial information. The main types of financial statements include:

• Statement of Financial Position (Balance Sheet): Displays assets, liabilities, and equity at a specific date, showing the company's financial position and sources and uses of financing
• Income Statement: Shows revenues, expenses, and net profit or loss during a specific period, measuring operational performance and company profitability
• Cash Flow Statement: Tracks cash inflows and outflows from operating, investing, and financing activities, showing the company's ability to generate cash
• Statement of Changes in Equity: Shows changes in capital, retained earnings, and reserves resulting from profits, losses, and withdrawals

Importance of Financial Statements for Small Businesses

Financial statements are among the most important management tools that small businesses should focus on, even though many small business owners may ignore them or consider them merely complex legal requirements. In reality, these statements represent the financial compass that guides the company toward success and sustainable growth, providing valuable insights into financial and operational performance. Without this organized financial information, making strategic decisions becomes like venturing in the dark. The importance of financial statements for small businesses is evident in several vital aspects:

• Informed Decision Making: Help business owners understand the financial situation and make sound decisions about expansion or downsizing
• Obtaining Financing: Banks and investors require financial statements to assess creditworthiness before granting loans
• Monitoring and Control: Enable tracking of financial performance and identifying financial problems before they worsen
• Future Planning: Provide a foundation for creating budgets and future financial plans
• Legal Compliance: Meeting tax requirements and various government agencies
• Profitability Analysis: Knowing which products or services generate the best returns
• Cash Flow Management: Help predict cash needs and avoid liquidity problems
• Attracting Partnerships: Demonstrating transparency and credibility to potential partners

Financial Statement Review Process

Financial statement review is considered one of the most important processes in the accounting and financial system of companies, aiming to ensure the accuracy and reliability of financial information and its compliance with adopted accounting standards. This complex process requires high professional expertise and deep understanding of accounting principles and the nature of the company's business, often requiring the appointment of independent external auditors from certified accounting firms to ensure neutrality and professionalism. External audit gains special importance for corporations and large institutions that need to build trust with investors, creditors, and regulatory bodies. The audit also helps improve accounting systems, strengthen internal controls, and discover weaknesses in financial operations. The comprehensive review process is conducted according to the following steps:

1. Appointing Auditors: Selecting a certified accounting firm or independent auditors with experience and professional reputation
2. Planning and Preparation: Studying the nature of the company's activity, determining the scope of review, and setting the timeline
3. Examining Accounting Systems: Evaluating internal control systems and followed accounting procedures
4. Document Review: Examining accounting records and supporting documents for financial transactions
5. Conducting Tests: Applying detailed tests on samples of transactions and balances
6. External Confirmations: Obtaining confirmations from banks, customers, and suppliers
7. Comparative Analysis: Comparing figures with previous periods and analyzing material variances
8. Reviewing Estimates: Evaluating the reasonableness of accounting estimates and provisions
9. Examining Subsequent Events: Reviewing important events that occurred after the balance sheet date
10. Preparing the Report: Writing the final audit report and expressing professional opinion on the fairness of financial statements