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 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. 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. 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. 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. 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. The final classification is the organization's income or loss under its current operations for this fiscal year, along with an estimate of expenses for next year. Here are the steps in creating a classified financial report: There are several benefits to reading through this type of report: 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. 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. 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. 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. 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. The Purpose of a Classified Financial Statement
How to Read and Understand a Classified Financial Statement
The Three Types of Classified Statements
Current Assets and Liabilities
Long Term Assets and Liabilities
Current Operating Income or Loss and Expenses
How to Create a Classified Financial Statement
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.Benefits of Reading and Understanding a Classified Report
Ways to Use This Information to Your Advantage as an Investor or Potential Investor
Common Mistakes When Creating the Statement
Tips for Using Them Effectively in Your Business
Ways to Improve What You're Currently Doing
The Bottom Line
Classified Financial Statement FAQs
A classified financial statement is a consolidated set of financial statements that break down an organization's numbers into different categories. The three major classifications found on such statements are: • Assets and liabilities • Income and expenses • Current operating income or loss and expenses
The purpose of a classified financial statement is to provide investors with a more holistic view of an organization. By breaking information down into its component parts, it is easier to identify potential problems before they become costly.
The best way to read and understand a classified financial statement is by following these steps: Decide what classification you want to look at Look at the statements that make up this classification Compare and contrast these numbers
It can help individuals make smarter investing decisions It can help organizations identify areas that need improvement, and even help them avoid making costly mistakes in the future It can help clarify potential problems and even save you money on future costs.
An example of a classification that would be listed on a classified financial statement is the classification of liabilities.
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®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, 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.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
