Financial statements are more than just a collection of numbers; they are the narrative of your company’s financial health and performance. For business owners, managers, investors, and other stakeholders in Singapore, understanding how to read and interpret these statements is fundamental to making informed decisions, assessing performance, and ensuring compliance with regulatory requirements. In Singapore, companies are required to prepare financial statements that comply with the Singapore Financial Reporting Standards (SFRS), ensuring a degree of consistency and transparency.

While the intricacies of accounting can be complex, grasping the basics of the key financial statements will provide invaluable insights into your company’s financial story. The primary financial statements you will encounter are the Statement of Financial Position, the Statement of Comprehensive Income, and the Statement of Cash Flows. The notes accompanying these statements are equally important for a complete understanding.

As noted in “The Singapore Corporate Director’s Manual [Accounts]” (Andy Chay, 1998), directors bear the primary responsibility for keeping proper accounting records and presenting financial statements that accurately reflect the company’s transactions and financial position.

The Statement of Financial Position (Balance Sheet)

Think of the Statement of Financial Position, commonly known as the Balance Sheet, as a snapshot of your company’s financial standing at a specific point in time. It follows the fundamental accounting equation:

Assets = Liabilities + Equity

  • Assets: These are what your company owns – resources that are expected to provide future economic benefits. Assets are typically categorised as:

    • Current Assets: Assets expected to be converted into cash or used within one year (e.g., cash, accounts receivable from customers, inventory).
    • Non-Current Assets: Assets held for the long term (more than one year), such as property, plant, and equipment, and intangible assets like patents or goodwill. When interpreting assets, look at the composition of current versus non-current assets and assess the company’s liquidity (ability to meet short-term obligations).

  • Liabilities: These represent what your company owes to external parties – obligations that need to be settled in the future. Liabilities are also typically categorised:

    • Current Liabilities: Obligations due within one year (e.g., accounts payable to suppliers, short-term loans, accrued expenses).
    • Non-Current Liabilities: Obligations due in more than one year (e.g., long-term bank loans, deferred tax liabilities). Analysing liabilities helps understand the company’s leverage and its ability to meet its debt obligations.

  • Equity: This represents the owners’ stake in the company – the residual interest in the assets after deducting liabilities. Equity typically includes share capital contributed by owners and retained earnings (accumulated profits less dividends paid out). Equity indicates the company’s net worth and the extent to which it is financed by its owners.

When reading the Statement of Financial Position, look at the relationships between these categories. Ratios like the current ratio (Current Assets / Current Liabilities) and the debt-to-equity ratio (Total Liabilities / Equity) provide insights into the company’s liquidity and financial risk.

The Statement of Comprehensive Income (Profit and Loss Account)

The Statement of Comprehensive Income, often referred to as the Profit and Loss (P&L) Account, shows your company’s financial performance over a specific period (e.g., a quarter or a year). It outlines the revenues earned and expenses incurred to arrive at the net profit or loss.

Key components to look for include:

  • Revenue: The total income generated from the company’s primary business activities (e.g., sales of goods or services).
  • Cost of Goods Sold (COGS): The direct costs attributable to the production or purchase of the goods sold by the company.
  • Gross Profit: Calculated as Revenue minus COGS. This indicates the profitability of the company’s core operations before considering other operating expenses.
  • Operating Expenses: Expenses incurred in the normal course of running the business, not directly tied to production (e.g., salaries, rent, utilities, marketing expenses). 
  • Profit Before Tax: Gross Profit less Operating Expenses and other income/expenses.
  • Income Tax Expense: The amount of tax payable on the company’s taxable profit.
  • Net Profit (or Loss): The final figure after deducting all expenses, including tax, from revenue. This is often referred to as the “bottom line” and indicates the company’s overall profitability for the period. The Statement of Comprehensive Income helps assess the company’s ability to generate profits, manage its costs, and understand the drivers of its financial performance over time. Looking at trends in revenue, gross profit margins, and operating expenses over several periods is crucial for interpretation.

The Statement of Cash Flows

The Statement of Cash Flows tracks the movement of cash into and out of your company over a specific period. Unlike the Statement of Comprehensive Income, which is based on accrual accounting (recognising revenue and expenses when earned or incurred, regardless of when cash is received or paid), the cash flow statement focuses purely on cash transactions. This provides a clear picture of how the company generates and uses cash, which is essential for its liquidity and solvency.

The statement is typically divided into three main sections:

  • Cash Flows from Operating Activities: Cash generated or used by the company’s normal day-to-day business operations (e.g., cash received from customers, cash paid to suppliers and employees).
  • Cash Flows from Investing Activities: Cash flows related to the purchase or sale of long-term assets, such as property, plant, and equipment, or investments in other companies. 
  • Cash Flows from Financing Activities: Cash flows related to how the company is financed, including borrowing money, repaying loans, issuing shares, or paying dividends to shareholders. 

Analysing the Statement of Cash Flows helps understand if the company is generating sufficient cash from its operations to sustain itself, how it is investing for the future, and how it is managing its debt and equity financing. Positive cash flow from operations is generally a healthy sign.

Notes to the Financial Statements

The main financial statements provide a summary of financial information. However, the notes to the financial statements are equally, if not more, important for a comprehensive understanding. These notes provide additional details, explanations, and disclosures about the information presented in the main statements.

The notes typically include:

  • Significant accounting policies adopted by the company.
  • Detailed breakdown of certain line items in the main statements.
  • Information about contingencies, commitments, and subsequent events.
  • Details of related party transactions.
  • Further information required by SFRS. Reading the notes is crucial for gaining a complete and accurate picture of the company’s financial position and performance and understanding the accounting treatments applied.

Interpreting financial statements requires looking at the figures not in isolation, but in conjunction with each other and over different periods to identify trends and assess the company’s overall financial health, performance, and sustainability.

Understanding your company’s financial statements is fundamental to effective business management and compliance in Singapore. For expert assistance with accounting, financial reporting, and gaining deeper insights into your company’s financials, the experienced team at Raffles Corporate Services Pte Ltd is here to help.

For further assistance or inquiries, you can contact the Raffles Corporate Services team via email at hello@rafflescorporateservices.com.

Yours sincerely, The editorial team at Raffles Corporate Services