Financial statements are a comprehensive picture reflecting the financial health and operational efficiency of a business, and serve as a crucial basis for management, auditing, and taxation. Preparing financial statements not only ensures legal compliance but also helps businesses enhance transparency, control risks, and support business decision-making. In this article, MAN – Master Accountant Network will analyze the concept, role, components, and important considerations when preparing financial statements, helping businesses create accurate, standardized financial statements for optimal management effectiveness.
What are financial statements and their indispensable importance?
Financial statements are the final and most important output of the accounting process, presenting a comprehensive and systematic overview of a business's financial position, operating results, and cash flows during a specific accounting period. According to Article 98 of... Accounting Law No. 88/2015/QH13Financial statements are mandatory tools that all accounting entities must prepare and present truthfully and fairly in accordance with current Vietnamese accounting standards.
The value of financial reporting lies not only in legal compliance but also in providing a foundation for investors, creditors, tax authorities, and auditors to make important economic decisions. A transparent and reliable set of financial reports enhances a company's reputation and helps management accurately assess its financial health to adjust strategies and manage capital effectively. Join MAN – Master Accountant Network to delve deeper into the role and significance of financial reporting.
The concept and legal basis of financial statements.
Financial statements comprise a system of tables and charts presenting fundamental accounting information such as assets, liabilities, equity, revenue, expenses, and profits. The content and format of financial statements must strictly comply with the regulations of Vietnamese Accounting Standards (VAS) and their detailed guidance documents.
The most important legal basis for preparing and presenting financial statements is the Accounting Law 2015. In addition, businesses often apply detailed guiding circulars, typically Circular 200/2014/TT-BTC (applicable to large, listed companies) or Circular 133/2016/TT-BTC (applicable to small and medium-sized enterprises). Choosing the appropriate accounting circular is the first step in ensuring the validity of financial statements.
The role of financial statements is crucial in governance, auditing, and taxation.
Financial reports play a central role and are an indispensable source of data for three core areas of a business: governance, auditing, and taxation.
Applications in management and investment
For management and investors, financial statements serve as a roadmap. By analyzing indicators such as ROA, ROE, and gross profit margin, management can assess the efficiency of asset utilization and the profitability of each segment. Investors use this information to determine growth potential, risks, and the true value of a stock, deciding whether or not to invest.
Role in independent auditing
In auditing, financial statements are the primary subject of the audit. Independent auditors use the information in the financial statements to assess potential risks, determine materiality, and express an opinion on the fairness and accuracy of the figures. The audit results serve to enhance the credibility of the financial statements for external users.
Basis for corporate tax settlement
Tax authorities use financial statements to verify compliance with tax obligations, particularly Corporate Income Tax (CIT) and Value Added Tax (VAT). Although there are differences between accounting profit (on financial statements) and taxable income, financial statements remain the primary document for tax authorities to verify recorded revenues and expenses. Discrepancies between accounting records and financial statements can lead to tax arrears and administrative penalties.
The five core components of a complete financial statement.
According to current regulations, a complete set of financial statements includes at least four principal statements and may include a statement of changes in equity as required (as per Circular 200/2014/TT-BTC).
| Report Title | Reflection Objective | Key Indicators | Relationship |
| Balance Sheet (B01-DN) | The situation regarding assets, liabilities, and equity at a specific point in time. | Cash & Cash Equivalents, Inventory, Accounts Receivable, Equity. | The basis for calculating liquidity and leverage ratios. |
| Business Performance Report (B02-DN) | The profitability of a business over a period. | Net revenue, Cost of goods sold, Profit before tax. | Net profit after tax is an input to the Statement of Cash Flows and Equity. |
| Cash Flow Statement (B03-DN) | Cash inflows and outflows are categorized into three activities: Business operations, Investments, and Financing. | Net cash flow from operating activities (CFO). | Explain the difference between Profit and Actual Cash Flow. |
| Explanatory notes to the financial statements (B09-DN) | Provide a detailed explanation of the accounting standards and policies applied. | The basis for the report, key assumptions, and details of major items. | Clarify and make the figures in the three main reports more transparent. |
| Report on changes in equity | Detailed changes in each equity item during the period. | Contributed capital, Share premium, Undistributed after-tax profit. | It serves as a bridge between the balance sheets of two consecutive periods. |
Balance sheet
The Balance Sheet is a snapshot of a company's financial position at a specific point in time (usually December 31st or June 30th). It adheres to the classic principle of balance: Assets = Liabilities + Equity.
The principle of balance: assets = capital
Assets are presented in order of decreasing liquidity (short-term assets first, then long-term assets), showing what the business owns. Liabilities & Equity indicate the source of assets (bank debt, supplier debt, owner's equity). This balance must always be maintained and is the first indicator of the accuracy of the financial statements.
Liquidity and solvency analysis
The indicators on the Balance Sheet are fundamental to assessing short-term solvency (Working Capital, Quick Ratio). If the Current Assets/Current Liabilities ratio is too low, the business may face a risk of cash shortages to meet short-term obligations. This is crucial information that auditors and creditors must pay particular attention to when reviewing financial statements.
Income statement
The Profit and Loss (P&L) report is a measure of a company's performance over a period. It reflects its actual profitability by comparing revenue with various types of expenses.
The objective of this report is to subtract Cost of Goods Sold, Operating Expenses, Financial Expenses, and Corporate Income Tax from Sales Revenue and Services Provided to ultimately determine Net Profit After Tax. This is the most important item for investors as it reflects the company's ability to generate value.
Cash flow statement
The cash flow statement is a crucial, often underestimated, component that provides the most accurate picture of a company's ability to generate cash. It explains why accounting profit (based on P&L) differs from the actual increase/decrease in cash during the period.
This report categorizes cash flow into three main activities:
- Chief Financial Officer (CFO): Cash flow from core operations, often the most important indicator of financial independence.
- Investment Activities (CFI): Cash flow related to the purchase, disposal of fixed assets, or financial investments.
- Financial activities (CFF): Cash flow from issuing/repurchasing shares, borrowing/repaying debt.
Explanatory notes to the financial statements
The Notes to the Financial Statements are an indispensable "translator" for the dry data on the three main reports. According to Vietnamese Accounting Standard No. 21 (VAS 21), the Notes provide detailed information on the basis for preparing the reports, the significant accounting policies applied, and detailed explanations of items with large balances or unusual fluctuations.
For example, the Notes to the Accounting System will clarify the depreciation method, the basis for provisions, or details of related-party transactions. This is the section where auditors and tax professionals focus on gathering information to assess risks and adjust taxes.
Report on changes in equity
Although not mandatory for all businesses under Circular 133, the equity change report is a crucial component of financial statements under Circular 200/2014/TT-BTC. It details the changes in each equity item during the period (e.g., distributed after-tax profit, increase/decrease in capital contribution, issuance of additional shares). The transparency of financial statements is significantly enhanced by this report.
Standards and regulations for the preparation and presentation of financial statements.
Preparing financial statements is not an arbitrary task but must adhere to a complex system of standards and legal regulations. The validity and reliability of financial statements depend entirely on compliance with these rules.
Vietnamese Accounting Standards (VAS) and guiding circulars
Vietnam applies the Vietnamese Accounting Standards (VAS) system, which includes 26 standards issued over the years. The VAS stipulates the principles, methods, and requirements for recognizing, measuring, and presenting economic transactions in financial statements.
Circular 200/2014/TT-BTC and Circular 133/2016/TT-BTC
These are the two main legal documents providing detailed guidance on the Corporate Accounting System and financial reporting templates.
| Criteria | Circular 200/2014/TT-BTC | Circular 133/2016/TT-BTC |
| Applicable subjects | Businesses in all sectors, except for SMEs. | Small and medium-sized enterprises (SMEs). |
| TK system | Detailed, complete, and mandatory. | Simplified and flexible process for opening additional level 2 accounts. |
| Financial Statement Template | All 5 reports are included (including the Equity Change Report). | Streamlined and simplified, only 4 main reports (the Change in Equity report is not mandatory). |
Businesses need to determine the correct scale to select the appropriate circular for preparing financial statements, avoiding errors right from the start.
Regulations regarding reporting periods and deadlines
The financial reporting period is typically the annual accounting period (ending December 31st). According to Clause 3, Article 109 of the 2015 Accounting Law, accounting entities must submit financial reports to the competent state authority within 90 days of the end of the fiscal year. For listed companies, the regulations regarding quarterly financial reporting are even stricter, as stipulated by securities law.
Responsibilities of the preparer and checker
The legal representative (usually the Director) and the Chief Accountant are primarily responsible for the accuracy and legality of the financial statements. The Chief Accountant must ensure that the financial statements are prepared in compliance with accounting standards and regulations and that calculations are accurate, while the legal representative bears ultimate legal responsibility.
Application of financial statements in analysis and decision-making.
The practical value of financial statements lies in their ability to be analyzed into meaningful financial indicators, supporting a comprehensive assessment of a business's performance and risks.
Financial analysis using groups of indicators
Financial statement analysis involves using financial ratios to assess profitability, solvency, operational efficiency, and financial structure.
Profitability indicators
These indicators are derived primarily from the Income Statement and Equity on the Balance Sheet.
| Target | Calculation Formula | Meaning |
| ROA (Return on Assets) | Net profit after tax / Average total assets | Profitability from total company assets. |
| ROE (Return on Equity) | Net profit after tax / Average equity | The potential for return on owner's equity. |
| Gross Margin | Gross Profit / Net Revenue | The effectiveness of core production and business operations. |
Analyzing the trends of these indicators across financial reporting periods will help identify changes in business strategy and cost management effectiveness.
Financial structure (leverage) indicators
This group of indicators assesses the extent to which debt and equity are used to finance assets. A high debt-to-equity ratio may indicate significant financial risk, a crucial warning sign for investors and banks when evaluating financial statements.
Applications in auditing (risk assessment)
Auditors use financial statements to perform analytical procedures.
- Horizontal analysis: Comparing items on financial statements across years to detect unusual fluctuations (for example, revenue increases by 50% but cost of goods sold only increases by 51%, signaling a risk of under-accounting for cost of goods sold).
- Vertical analysis: Comparing the proportions of different items (e.g., Selling expenses accounting for an unusually large percentage of revenue).
These anomalies provide the basis for auditors to identify areas with a high risk of material misstatement, thereby adjusting the scope and procedures of the audit.
Applications in tax accounting (corporate income tax settlement)
As mentioned, financial statements are the starting point for corporate income tax settlement. Tax accountants need to compare the Accounting Profit before tax (from the Income Statement) with the regulations on deductible and non-deductible expenses under the Corporate Income Tax Law.
For example: An interest expense recorded in the financial statements is valid, but during tax settlement, it may be disallowed (become a non-deductible expense) if it exceeds the limit stipulated in Decree 132/2020/ND-CP (on related-party transactions). This adjustment must be clearly stated in the Corporate Income Tax Return and must be an integral part of the financial statements submitted to the tax authorities.
Common mistakes and important considerations when preparing financial statements.
Preparing financial statements often involves numerous challenges and common errors, requiring accountants to have in-depth experience to handle them.
Errors in the application of accounting principles
A common error is violating the accrual basis principle. For example, recognizing revenue immediately upon issuing an invoice before the goods/services have been delivered, or conversely, failing to recognize accrued expenses. This error seriously affects the accuracy of profit on financial statements.
Classification and presentation issues
Misclassifying current assets from long-term assets (or short-term liabilities from long-term liabilities) is a common error, especially with loans. This alters liquidity ratios, misleading users of financial statements about a company's ability to meet its short-term debt obligations.
Data manipulation and fraud risks
Although rare, some businesses intentionally manipulate figures on their financial reports to "beautify" their financial statements or optimize taxes. Common methods include:
- Revenue Recognition (Revenue Recognition) occurs too early.
- Inventory overstatement is used to reduce the cost of goods sold.
- Failure to make adequate provisions for doubtful receivables or inventory write-downs.
Auditors and tax authorities employ sophisticated techniques to detect signs of financial statement manipulation, including analyzing large transactions near the end of the period, examining key accounting estimates, and cross-referencing with other independent data sources.
| Legal documents | Areas of direct application | Impact on financial statements |
| Accounting Law 2015 | Prepare, present, and disclose financial statements. | Ensuring legal compliance and a common framework. |
| Circular 200/2014/TT-BTC | Business accounting system. | Detailed regulations on forms and accounting methods. |
| Corporate Income Tax Law | Tax settlement. | Identify deductible/non-deductible expenses, which lead to adjustments in accounting profit. |
| Decree 132/2020/ND-CP | Related party transactions. | Limiting interest expense affects the financial costs on the P&L of the financial statements. |
A thorough understanding of legal regulations and the application of practical experience are key factors in preparing a set of financial statements that are not only accurate but also tax-optimized.
Conclude
Financial statements are not just a collection of numbers, but also living evidence that truthfully and comprehensively reflects the operations and financial situation of a business. From an accounting perspective, preparing financial statements requires meticulous attention to detail and strict adherence to standards; from an auditing perspective, they are used to assess risk and confirm reasonableness; and from a tax perspective, financial statements are the basis for determining tax obligations to the state budget.
If your business needs a reliable partner to ensure accurate, transparent, and tax-optimized financial reporting, contact MAN – Master Accountant Network today. MAN provides auditing services, full-service tax accounting and in-depth financial consulting, helping businesses control risks, optimize costs, and improve management efficiency. Don't wait for risks to appear – let MAN be your partner and turn financial and tax compliance into a competitive advantage.
Service contact information at MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
- Mobile/Zalo: 0903 963 163 – 0903 428 622
- Email: man@man.net.vn
Content production by: Mr. Le Hoang Tuyen – Founder & CEO MAN – Master Accountant Network, Vietnamese CPA Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.
