What Are Financial Statements & Do I Need to Audit Them?
Every business owner enjoys developing great products and services for their customers. But, when it comes to managing the company’s financial statements, it can be a little bit of a daunting task to entrepreneurs there are many technicalities that may be overlooked.
In this article, we’ll explain why financial statements are important, when they need to be submitted and to whom, and, lastly, which companies are required to audit their financial statements.
What is the Importance of Financial Statement?
Financial statements are reports that show a company’s financial performance and position either at a particular point in time or over the course of the financial year. They tell you where your money came from, what it was spent on, and how much of it you have. They’re usually published at the end of the financial year.
Financial statements give the company’s management and all relevant stakeholders important information about the company’s financial position. Financial statements are important in business as it provides users, such as shareholders, with a clear picture of whether the company is profitable or losing money, as well as the ability to make informed decisions about the company's future by analyzing past performance. Without financial statements, it’s more difficult to get a loan or attract outside investors.
The Four Components of Financial Statements
Profit and Loss
There are four types of financial statements. First, there’s the income statement, often referred to as the profit and loss statement. The income statement is a picture of how much money you earned (revenue) and how much you spent (expenses) over the accounting period.
Income statements show the types of revenue and expenses the company accrued over the accounting period. This includes sales revenue, interest revenue, cost of goods sold, selling, general and administrative expenses (SG&A), wages, utilities, and so on. At the end of the income statement, you’ll find your profit before taxes, how much you paid in taxes, and your net profit.
While the income statement shows your company’s financial position over time, the balance sheet is a snapshot of its assets and liabilities at one point in time. Assets include equipment, cash, inventory, buildings, accounts receivable, patents, and more. A few examples of liabilities are credit card debt, bank loans, accounts payable, and so on.
The statement of owner’s equity, sometimes included in the balance sheet but sometimes also listed separately, is a summary of how much the company’s owner(s) invested in and withdrew from it over the accounting period.
Finally, we have the statement of cash flow, which shows the flow of cash into and out of the company over the accounting period. This helps management understand if the company generated a sufficient amount of cash from its operations.
When Do My Financial Statements Need to Be Submitted & to Whom?
Every incorporated company in Singapore is required to file financial statements with the Accounting and Corporate Regulatory Authority (ACRA), except those that are exempt. If you are a sole proprietorship, partnership, limited liability partnership, or limited partnership, you do not have to file financial statements with ACRA. However, regardless of your exemption, it is still encouraged for you to do so prepare your financial statements whether your company is active or dormant as your company secretary requires the financial statements to determine the company’s solvency and prepare for annual general meetings (AGM) accordingly. It is also necessary to file the company’s Annual Returns (AR) with accuracy.
Companies that have branches outside Singapore must file their financial statements within eight months of the end of the financial year. All other companies have to file them within seven months of the financial year-end.
Who Needs to Audit Their Financial Statements?
A financial statement audit is when an independent, third-party auditor examines a company’s financial statements and judges the fairness and accuracy of these documents. The purpose of an audit is to add credibility to the financial statements so that people reading them know that everything is accurate.
The Singapore Companies Act states that every company must have its financial statements and accounting records audited annually by an independent auditor unless it qualifies as a small company. This happens if the company satisfies at least two of the following three criteria:
- The company’s total annual revenue does not exceed S$10 million
- The total assets of the company at the end of the financial year do not exceed S$10 million
- The company has no more than 50 full-time employees at the end of the financial year
A group company, which is “a holding company and its subsidiaries that together form a group due to a common source of control”, also qualifies for the audit exemption if it meets a few conditions. Specifically, the holding and all subsidiary companies individually must:
- Fulfil at least 2 of the aforementioned small company conditions
- Belong to a “small group”
The holding and subsidiary companies qualify as a “small group” if they satisfy two of the following three conditions in the preceding two financial years:
- The consolidated revenue is no more than S$10 million
- The group has no more than 50 full-time employees
- The consolidated total assets are no more than S$10 million
When in Doubt, Hire Experts
Regardless of whether your company is exempt from filing your financial statements with ACRA, it is still of great importance to not only file them, but do so with accuracy. Our team of chartered accountants can manage your company’s finances with ease. Financial statements are essential to circulate among stakeholders and shareholders, allowing for informed decision making regarding the future of the company. Here at Sprout, we want you to focus on what you do best and let the experts do the rest. Check out our budget friendly packages and feel free to contact us with any of your queries, we’ll respond within 24 hours.