Annual financial statements are regulated by the Internal Revenue System (IRS) and the U.S. Securities and Exchange Commission (SEC). The aim of creating a financial statement is to compile and process information on a company’s economic situation. There are two goals:
- Information about the results of operations, financial position, and cash flows of an organization
- This information is used to estimate the liquidity, funding, and debt position of an entity, and is the basis for a number of liquidity ratios
Annual financial statements are required for the public (if you have a publicly traded company) and for taxation authorities, as they may use your financial statements in their tax assessments. Annual financial statements show how high a company’s profits or losses are and can be then used to calculate income tax.
The primary aim of a financial statement for publicly traded companies, however, is to inform shareholders and the public. Annual financial statements are filed as part of your company’s annual report. Financial statements for a public company must be made available to anyone who requests access, and must be filed quarterly with the SEC. You are also required to file an annual report with the Secretary of State in each state in which you operate. Interested parties, like shareholders or potential investors, can use this information to assess how secure their investments are, or would be, in the company.
Public company owners are required to file annual financial reports in the state where their business was formed, and again in every state in which their company operates. Deadlines are usually based around the date that your company was created; the filing requirement begins a year after formation and continues until the company is dissolved. However, there are some states that set their own annual deadlines, and things can quickly become confusing if you are a business owner operating in numerous states. Consulting a tax professional is the best way to ensure that you are legally complying with all your state deadlines.
Annual financial statements are also important for internal communication. An overview of a company’s financial situation means that there is accountability. Management is obliged to prove how and to what extent capital has been used. The different groups involved in a company (shareholders, investors, etc.) can measure the success or failure of their management by this. That is why the detailed listing of all items in the balance sheet and income statement (the two main components of annual financial statements) is so important. The result isn’t the only thing that counts: a bad business appraisal does not necessarily mean that those responsible have done a bad job. Only an in depth look at the exact figures can reveal where the errors lie.