What Types of Financial Statements Are Useful for Board Members?
The members of a company’s board of directors are responsible for setting overall policy and are ultimately answerable to shareholders for the financial health of the organization. In order to effectively carry out their duties, board members must have timely information in the form of financial statements or reports that provide a comprehensive overview of the company’s financial status.
The essential information members of a board of directors need is contained in four basic financial statements: the balance sheet, income statement, cash flow statement and the statement of shareholders’ equity. Yearly versions of each must be included in the company’s annual report. Interim versions of thee financial statements are also useful to a board of directors and are usually issued on a quarterly schedule. Of course, board members make use of a variety of other financial reports. However, the four basic financial statements provide the concise information required to place supplementary reports in context.
A balance sheet is often referred to as a snapshot of a company’s current financial condition. The format is standardized, with a list of the company’s assets placed first. Next is a section listing the company’s liabilities and last, a section that states the amount of stockholders’ or owners’ equity. For the board of directors, the balance sheet provides a concise picture of the company’s current financial condition. In addition, by comparing current and previous balance sheets, it is easy to identify changes.
The income statement begins by stating the company’s revenues for the accounting period covered. The remainder of this financial statement provides a detailed breakdown of expenditures. A listing of the cost of goods sold and operating expenses is followed by entries for depreciation, taxes, interest earned or paid and other non-operating revenues and expenses. The final entry, nicknamed the bottom line, is the company’s net earnings. In essence, the income statement tells the board of directors where the money went.
Cash Flow Statement
Part of the responsibility of the board of directors is to make sure money is available to pay the bills. The cash flow statement is important because it describes changes in the amount of cash a company has on hand. There are three sections in a cash flow statement. The first deals with changes in cash available due to operating activities. Net income is adjusted for items like depreciation and dividends paid. A second section states the effect of investment activities such as the purchase of equipment and the sale of assets on cash flow. The financing activities section states changes in the amount of cash on had resulting from the sale or repurchase of stock and of borrowing money and repaying debts.
Statement of Shareholders' Equity
The statement of shareholders’ equity keeps shareholders and the board of directors current on changes in the equity of the company resulting from retained earnings and the sale or repurchase of capital stock. A quick glance at the previous total shareholders’ equity at the top of this financial statement and at the current equity at the bottom tells a board member how much total shareholder’s equity has changed during the accounting period covered.
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