Written by Axel Firer, Business Expansion Director
Axel has built a distinguished career in project management, focusing on the finance and insurance sectors. He started his career in 2011 in Japan, where he honed his skills at a prominent French Investment Bank, working with both the Finance and Operations departments.
Key Takeaways
Financial statements summarise a company's financial activity, namely its position, performance, and cash flows. at a point in time.
There are four primary types: the balance sheet, the income statement, the cash flow statement, and the statement of retained earnings.
Some frameworks count five, adding the statement of changes in equity and the notes to the accounts as reported elements.
Whether your statements must be audited depends on where you're incorporated: Hong Kong requires an audit for almost every company, while Singapore exempts qualifying "small companies."
Whether you're just starting out or have been trading for years, at some point you'll need to show exactly where your business stands, whether for a loan application, an investor pitch, or a pricing and revenue decision. That's what financial statements are for.
This guide covers what financial statements are, why they matter, the four main types with examples, how they connect, and when they have to be audited in Hong Kong and Singapore.
What Is a Financial Statement?
Financial statements are a set of written records that show a company's financial activity and performance over a specific period, usually annually, quarterly, or monthly. Their job is to give internal and external stakeholders a clear view of the company's financial position.
They're typically prepared by bookkeepers and accountants, who follow a recognised accounting framework. Which framework depends on where the company operates: companies in Hong Kong report under the Hong Kong Financial Reporting Standards (HKFRS), Singapore companies under Singapore Financial Reporting Standards (SFRS), and US companies under US GAAP. All three are built on (or closely converge with) the IFRS Accounting Standards used in more than 140 jurisdictions.
Why You Need Financial Statements
Financial statements matter for three main reasons: tracking financial health, securing funding, and staying on top of tax.
Many companies prepare statements quarterly to check profitability, stability, and how resources are being used. That feeds better decisions on pricing, cost control, and growth planning.
When you go looking for outside investment or a loan, these statements give shareholders and creditors the detail they need to judge creditworthiness, risk, and potential return. Well-prepared statements make funding easier to secure.
Finally, annual financial statements underpin tax reporting and return filing. Documenting income, expenses, assets, and liabilities makes the yearly paperwork for tax authorities far simpler.
4 Types of Financial Statements
The primary financial statements are the balance sheet, the income statement, the cash flow statement, and the statement of retained earnings. Each gives a different view of a company's finances; together they form a complete picture for owners, stakeholders, and investors.
Balance Sheet
A balance sheet summarises what a company owns (assets), what it owes (liabilities), and the shareholders' net worth (equity) at the end of a specific period, most often a year. It's also called a statement of financial position.
| Section | Item | What It Covers |
|---|---|---|
| Assets | Current assets | Cash and cash equivalents, plus assets expected to convert to cash within a year (inventory, accounts receivable, prepaid expenses) |
| Assets | Fixed / long-term assets | Assets used in operations to generate revenue, such as property and equipment |
| Liabilities | Current liabilities | Debts due within a year, such as accounts payable and credit-card balances |
| Liabilities | Long-term liabilities | Debts due beyond a year, such as term loans and mortgages |
| Equity | Share capital & paid-in capital | Shares issued and money invested by shareholders |
| Equity | Retained earnings | Profits kept in the business rather than paid out as dividends |
It's called a balance sheet because total assets must equal total liabilities plus shareholders' equity:
|
Total Assets = Total Liabilities + Total Shareholders' Equity |
Income Statement
An income statement shows revenue and expenses over a period and whether the company made a profit or a loss. It's also known as a profit and loss (P&L) statement or an earnings statement, and it helps owners see which strategies grow profit, whether by raising revenue or cutting costs.
Its main components include: revenue (total income earned in the period), cost of goods sold (materials and labour to make the product), gross profit (revenue minus COGS), total expenses, operating income (profit after operating costs), depreciation (the fall in asset value over time), pretax income, and net income (what's left after all costs).
The core formula is:
|
Net Income = Revenues − Expenses |
Cash Flow Statement
A cash flow statement aggregates all the cash and cash equivalents moving in and out of a business over a period. It shows where cash comes from, where it goes, and whether the business has enough liquidity to meet its obligations and invest. It has three parts: operating activities (cash from day-to-day operations), investing activities (buying or selling assets), and financing activities (raising or repaying debt and equity).
Want to go deeper into the subject? See our guide to the cash flow formula.
Statement of Retained Earnings
The statement of retained earnings shows the net income a company keeps after paying dividends, and how that balance changes over an accounting period. Retained earnings are usually used to pay down debt or reinvest. Some companies fold this information into the income statement or balance sheet instead of publishing it separately; it's also called a statement of changes in equity. Its three elements are beginning retained earnings, net income for the period, and dividends paid.
The formula is:
|
Retained Earnings = Beginning Retained Earnings + Net Income − Dividends |
Four Statements or Five?
You'll see some sources refer to "five" financial statements, which is why the count can be confusing. The difference is usually presentation, not substance. Two items account for the gap:
- The statement of changes in equity. This tracks every movement in shareholders' equity, not just retained earnings but also share issuances, buybacks, and other reserves. Frameworks like IFRS treat it as a full statement in its own right, which is where the "fifth" often comes from.
- The notes to the financial statements. These aren't a numbered statement, but under HKFRS, SFRS(I), and IFRS they're a required part of a complete set of financial statements. The notes explain the accounting policies and give the detail behind the headline figures.
So "four" and "five" describe the same underlying reporting, the count just depends on whether the statement of changes in equity is shown separately and whether the notes are counted as a reported element.
You'll also hear people talk about the "big three", specifically the balance sheet, income statement, and cash flow statement. That's not a different set of rules. Analysts and investors simply focus on those three because they carry most of the decision-useful information, with the statement of changes in equity and the notes supporting them.
How the Statements Connect
A company's operating, investing, and financing activities are all linked, so the statements feed into each other.
Net income from the income statement starts off the cash flow statement and flows into retained earnings on the balance sheet. Depreciation recorded on the income statement reduces asset values on the balance sheet.
Changes in working capital, asset purchases, borrowing, debt repayment, dividends, and share buybacks all move the cash and equity balances on both the balance sheet and the cash flow statement.
Read together, the four statements reconcile, which is exactly why lenders and investors ask for the full set rather than one in isolation.
Limitations of Financial Statements
Financial statements are essential, but they don't tell you everything, and knowing the gaps keeps you from over-relying on them:
- They look backwards. Statements report what already happened; they don't predict future performance, so past results aren't a guarantee of what comes next.
- They miss non-financial factors. Brand reputation, customer loyalty, employee morale, and market position all shape a company's real health but never appear on the statements.
- They don't adjust for inflation. Assets are usually recorded at historical cost, so the figures can understate what things are actually worth today.
- They rely on estimates and judgment. Depreciation methods, provisions, and revenue-recognition choices vary by company, which makes side-by-side comparisons less clean than they look.
Used alongside context (industry trends, management commentary, and the notes to the accounts), financial statements are powerful. But if read in isolation, they can mislead.
Do Financial Statements Need to Be Audited?
Unaudited statements are prepared by accountants but haven't been examined by an independent external auditor. Audited statements have been reviewed by a certified public accountant (CPA) to confirm they comply with the relevant accounting standards. Audited statements carry more weight, but they cost more and take longer to produce.
Whether an audit is required depends entirely on where you're incorporated:
- Hong Kong: Almost every company must have its financial statements audited every year. Under the Companies Ordinance, all Hong Kong-incorporated companies except dormant ones must prepare HKFRS statements and have them audited by a CPA holding a practising certificate from the Accounting and Financial Reporting Council (AFRC), which registers auditors for statutory audits under the Companies Ordinance. We cover the process in our guide to the audit report in Hong Kong.
- Singapore: Not every company needs an audit. Under ACRA's rules, a private company can be exempt as a "small company" if it meets at least two of three conditions (total annual revenue and total assets each at or below SGD 10 million, and 50 or fewer employees) across its last two financial years. Exempt companies still have to prepare and file unaudited statements.
- United States: Publicly traded companies must file audited statements with the SEC. Private companies generally aren't required to, though lenders and investors often ask for them anyway.
When you're raising a loan or funding, most creditors and investors prefer audited statements regardless of whether the law requires one.
Keep Clean Records From Day One
Accurate financial statements start with clean bookkeeping, and bookkeeping gets messy fast when personal and business money share one account. A dedicated business account is the practical first step, especially one that plugs into your accounting software so transactions sync automatically instead of being keyed in by hand.
If your company is registered in Hong Kong, Singapore, or the BVI, Statrys offers a multi-currency business account with Xero integration and a reporting dashboard that makes statement prep far less painful.
FAQs
What is a simple explanation of financial statements?
Financial statements are summaries of a company's financial activity (its income, expenses, assets, liabilities, equity, and cash flow) at a particular point in time.
What are the four types of financial statements?
The four are: the balance sheet (assets, liabilities, and equity at a point in time); the income statement (revenue and expenses, giving net profit or loss); the cash flow statement (cash moving in and out, showing liquidity); and the statement of retained earnings (profits kept in the business after dividends).
What are the five elements of financial statements?
When people refer to five, they usually add the statement of changes in equity and the notes to the accounts to the four main statements. The statement of changes in equity tracks all movements in shareholders' equity, and the notes explain the accounting policies and the detail behind the numbers. It's the same reporting described two different ways.
What is the objective of financial statements?
To give stakeholders a clear, accurate view of a company's financial position and performance, which supports strategic decisions, funding, and regulatory compliance.
When do you need financial statements?
Most often for annual tax reporting, quarterly performance reviews, and loan or funding applications. They're also needed for major events like a change of ownership, a sale, or a merger, where an up-to-date financial snapshot is essential.
Can I prepare financial statements myself?
Depending on the size and complexity of your business, you may be able to prepare unaudited statements yourself, but it's generally not recommended. Errors can lead to fines and complications, so working with someone who knows the accounting standards is usually safer. Audited statements must be prepared by a CPA or equivalent professional.
What are the limitations of financial statements?
They report past performance rather than predicting the future, don't capture non-financial factors like brand or market position, usually ignore inflation (assets sit at historical cost), and rely on management estimates, so they're best read alongside industry context and the notes to the accounts, not in isolation.
