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Balance Sheet and Income Statement

What do the balance sheet and income statement represent?

The definition depends on our understanding of the content of the balance sheets and the rules governing their preparation. If we want to obtain objective information about the operations and financial position of a company by reading its balance sheets and income statements, we must first understand what the balance sheet fundamentally is.

According to current legislation, the balance sheet and income statement (referred to as such in the Companies Act) are basic and mandatory accounting statements that a company must submit to the AJPES once a year.

Essentially, the balance sheet and income statement are two sides of the same coin. The income statement, through a review of revenues and expenses, tells us how the company performed or generated income in a given year, while the balance sheet tells us what the outcome of this performance was or how its assets changed after the year of operation. Therefore, the income statement tells us how the company, through its operations, generated the assets it shows in the balance sheet at the end of the year (this connection between the balance sheet and income statement is more clearly illustrated in the statement of cash flows).

It is also worth mentioning that the balance sheet and income statement provide key input data for assessing a company’s risk, professionally referred to as a credit rating. Both of these financial statements are also indispensable sources of data for all credit reports.

The rules for preparing and the content of items in the balance sheet and income statement are determined by Slovenian Accounting Standards (SRS) and International Financial Reporting Standards (IFRS). Therefore, when reading the balance sheet, it is useful to know the basic rules, assumptions, and requirements that accounting standards demand when compiling balance sheets or when valuing items in business books.

When analyzing officially published balance sheets and statements of companies, one must always proceed with caution. We can only assume that the balance sheets and statements are prepared fairly and in accordance with applicable laws and professional standards. Unfortunately, this is not always the case in practice. Therefore, when making important decisions that could be based on the creditworthiness of companies, it is better to leave the analysis to professionals, including a credible credit rating agency.

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