What Are Financial Reports And What Do They Reveal?

What Are Financial Reports?

The term Financial Reports is commonly associated with accountants and is defined under the Corporations Act 2001 (Cth). Section 295 of the Act outlines that a full Financial Report includes:

• Financial Statements

• Notes to the Financial Statements

• Directors’ Declaration

When prepared under Australian Accounting Standards, these reports typically comprise:

• Profit and Loss Statement

• Balance Sheet

• Cash Flow Statement

Let’s break down these three key documents, what they are designed to communicate, and what they often fail to capture—particularly when not prepared under formal accounting standards.

Profit and Loss Statement

Also called the Income and Expenditure Statement, this document reports the income and expenses for the year, showing whether a business made a profit or a loss.

While most people intuitively grasp the basic profit-or-loss result, the P&L can offer more sophisticated insights, such as:

• Gross and contribution margin analysis

• Interest cover ratios

• Abnormal or extraordinary items

• Tax expenses and distributions

However, it’s important to understand what the P&L doesn’t show:

• It is prepared on an accruals basis, not a cash basis

• It includes non-cash expenses like depreciation and amortisation

• It does not reveal the actual cash flow position of the business

Balance Sheet

Also known as the Statement of Financial Position, the Balance Sheet outlines the business’s assets, liabilities, and equity at a specific point in time.

By definition:

• Total Assets – Total Liabilities = Equity

• Or Assets = Liabilities + Equity

The Balance Sheet reveals:

• Whether a business is in a Net Asset or Net Liability position

• Its working capital (Current Assets – Current Liabilities)

• Asset and liability categories and structure

However, the figures may not reflect market value, and some assets or liabilities might not appear at all—especially intangible or contingent items.

In practice, many Balance Sheets don’t balance, which is an immediate red flag for errors or incomplete data.

Cash Flow Statement

Also referred to as the Statement of Cash Flows or Source and Application of Funds, this report details how cash enters and leaves the business. It’s often not prepared unless required by law—despite being critical for decision-making.

It covers three sections:

1. Operating Activities: Cash from core business operations

2. Investing Activities: Cash from buying/selling long-term assets

3. Financing Activities: Cash from loans, dividends and equity changes

The purpose is to reconcile the opening and closing cash balances and determine whether the business is generating positive cash flow—or simply surviving on financing.

Key Takeaway: Financial Statements Are Historical

All financial reports are backward-looking and often published well after the reporting period ends. While useful for understanding the business's past performance, caution is essential when using them to assess its current or future health.

They may also be affected by creative accounting, where figures are legally manipulated to present a more favourable picture. This will be explored in an upcoming blog post.

Final Thoughts

If you're relying solely on financial reports to assess a business—yours or someone else’s—you need to go deeper. Whether you’re a business owner, investor, or legal adviser, understanding what these documents do and don’t reveal is critical to making informed decisions.

If you’re unsure about interpreting your business’s financials, we’re here to help. At Dolman Bateman, we specialise in turning numbers into real insight.

Book a consultation today to speak with our expert team.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.