Classified Financial Statement
A classified financial statement is a document that shows the financial standing of an organization at two distinct points in time. It includes both the current year’s data and the projected data for next year. There are three types of classifications within this report:
– Long term assets and liabilities
– Current operating income or loss and expenses
The Purpose of a Classified Financial Statement
The purpose of a classified financial statement is to provide investors with a snapshot of the organization’s financial health. The intent is not only to gain their trust but to show how well it will be able to sustain itself in the future.
By creating a plan for success and including it as part of the statement, the organization is projecting how capable it is of continuing to grow. This gives investors and shareholders a better idea of what they can expect from the organization in the future.
The different classifications help paint a picture for readers about where the organization stands at that moment in time, and what is expected to happen next year.
How to Read and Understand a Classified Financial Statement
Prior to reading a classified financial statement, it is important for readers to understand what each classification means.
This will allow them to better interpret the numbers listed in order to get the most out of the information provided.
The Three Types of Classified Statements
There are three types of classifications within this report: Current assets and liabilities, Long term assets and liabilities, and Current operating income or loss and expenses.
Current Assets and Liabilities
This section is divided into two parts. The first is the current assets and liabilities of the organization, and the second part shows how those numbers will change next year.
Long Term Assets and Liabilities
The long-term assets and liabilities of an organization remain relatively constant over time, but because they are not necessarily tied to revenue streams or expenditures, they are not shown in the current statement. Instead, this section shows how these numbers will change next year.
Current Operating Income or Loss and Expenses
How to Create a Classified Financial Statement
Here are the steps in creating a classified financial report:
- Start by writing down your organization’s income and expenses for this year and next.If the year is already finished, gather up all of your financial documentation and record them as best you can currently.If it is not yet finished, estimate what will happen during that time period. Make sure to include any projections or goals for the future.
- Record your long-term assets and liabilities and then determine how that will change for next year’s numbers.
- Determine the current assets and liabilities of your organization, whether they are increasing or decreasing, and how much it is changing from this year to next.
- Write out any information about future events such as potential acquisitions or new construction.
- Next, lay out a clear and concise way to show your readers what you have written on paper in a comprehensive report for them to understand easily.
- Ensure that all of the information is organized clearly with no vague statements or financial jargon so they can both follow along and use it as a reference in the future.
Benefits of Reading and Understanding a Classified Report
There are several benefits for reading through this type of report:
- It allows you to prioritize where you spend your time and energy, both of which are limited resources.
- By separating this information into different classifications, the user can determine what is most important when it comes to their accounting tasks.
- Oftentimes a classified financial statement will be given to an outside investor in order to show them the state of the organization’s accounts and the potential future of it.
- These reports can be used as a business tool, allowing you to show outside investors the organization’s current state and how it is performing.
- Using classified financial statements allows you to think of ways that your accountant could improve upon your system in order to make the task of managing money more efficient for your business.
Ways to Use This Information to Your Advantage as an Investor or Potential Investor
As an investor or potential investor, reading and understanding a classified report can help individuals make better investment decisions.
By seeing where the organization has been successful and identifying areas that need improvement, it is possible to gain a better idea of how the organization works as a whole.
This allows readers to determine whether or not they would have faith in it.
Common Mistakes When Creating the Statement
When creating a classified financial report, it is common for organizations to unintentionally omit valuable information.
Accordingly, investors may not be able to get as much out of the document as they would like. This can lead to negative consequences for interested parties, potentially creating a problem before it ever has the chance to develop.
In many cases, organizations communicate with investors using the three classifications mentioned above without explaining why they are relevant or what numbers fit into each category.
This creates more work for readers and doesn’t help them learn how to use the information.
Tips for Using Them Effectively in Your Business
The best way to avoid making common mistakes when creating a classified financial statement is to be able to think like your audience.
While you may understand the significance of each classification, it will do no good if the document is never read or understood by anyone else.
If an organization is making an effort to create a statement but has no interest in actually giving the information to its readers, it may be time for them to reevaluate its approach.
Ways to Improve What You’re Currently Doing
It is possible that you already have a good classified financial report and simply want to improve upon it.
If this is the case, there are a few ways you can make sure that investors get what they need out of your reports.
- Think about how to best present information in a way that is easy for anyone to understand.
- Write your statement in an active voice so that it doesn’t feel like one big block of text.
- Focus on the main ideas rather than trying to cram every detail into one line.
- Remember that providing more data is not always better. Sometimes it’s best to keep things simple and only include the key information readers need.
The Bottom Line
Reading and understanding a classified financial statement can be beneficial on multiple levels.
It can help individuals make smarter investing decisions, help organizations identify areas that need improvement, and even help them avoid making costly mistakes in the future.
If you want to maintain an established business relationship with your investors, it is important that their classified report is comprehensive enough for them to feel like they learned something.
While this may not be possible with every business, it is important that you remember this point and try your best to meet the needs of your audience.
Classified financial statements are just as powerful as their audience makes them out to be.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.