Understanding Key Financial Statements and Audits

Financial Statements Components

Financial Statements: Include the balance sheet, profit and loss account (income statement), cash flow statement, statement of changes in equity, and the annual report (memory).

Accounting Framework and Auditing

• PGC (Plan General de Contabilidad): Establishes the legal and technical framework for accounting standards. It ensures that fundamental economic and financial information reported by companies is reliable and comparable.
• External Audit: A review of annual accounts conducted by independent professionals applying accepted legal standards.
• Internal Audit: Performed by company personnel to verify the existence, implementation, and effectiveness of the organization's internal controls.

Types of Review

Operational Review

Discusses review procedures conducted by the organization aimed at analyzing the effectiveness and efficiency of the company's overall structure.

Financial Review

Examines and verifies the company's financial statements to confirm that the data accurately reflects its position.

Annual Report (Memory)

Contains explanations and details regarding specific aspects of the balance sheet and income statement not fully captured elsewhere.

Key Reporting Elements

• Activity: Describes the purpose of the business or the activity to which the company is dedicated.
• Financial Assets: Records the book value of financial assets.
• Financial Liabilities: Records the accounting value of financial liabilities.
• Tax Details: Location and details regarding taxes and corporate taxes the company faces.

Financial Structure Analysis

Heritage (Equity Structure]

Study and analyze the composition of the active structure, equity, and liabilities, including relationships between different balance sheet masses, financial assets, and investments.

Financial Analysis (Solvency and Liquidity)

Study the solvency and liquidity of investments (i.e., the company's capacity to meet its obligations in the short and long term).

Economic Analysis (Profitability)

Study the results from the company's profit and loss account to gain a collective view of profitability and growth productivity.

Patrimonial Situations (Financial Stability Levels)

These levels assess the company's debt status:

1. Total Financial Stability: No company debt.
2. Normal Financial Stability (FM): Operates with debt, but the result is positive.
3. Suspension of Payments (Pc > K): Indicates immediate payment difficulties.
4. Long-Term Financial Disequilibrium: All debt is long-term.
5. State of Insolvency (Debt > Assets and Rights): Liabilities exceed assets and available cash.

Cash Flow Metrics

Financial Cash Flow

The difference between cash receipts (Scobraments) and payments made during an accounting period.

Economic Cash Flow

The sum of profits and depreciation. This provides an estimation of the company's ability to self-fund operations.