Understanding Financial Statements: A Basic Guide for Hong Kong Businesses

Why Are Financial Statements Important?

Financial statements serve far more purposes than just satisfying tax filing requirements. They are essential for building transparency with external stakeholders and for making sound management decisions internally.

For Investors and Lenders

For potential investors or financial institutions, financial statements are often the first point of reference when assessing a business. These documents reveal whether the company has a stable source of revenue, a balanced capital structure, healthy cash flow, and sustainable net income. Based on this information, stakeholders decide whether to invest or extend credit.

For example, the balance sheet outlines what the company owns and owes at a specific point in time. The income statement reflects profitability over a given period, while the cash flow statement tracks the actual movement of funds in and out of the business. Together, these statements offer a comprehensive view of the company’s financial position.

For Business Owners and Internal Teams

For SME owners, financial statements are equally important as day-to-day management tools. A clear view of income, expenses, assets, and liabilities allows you to:

• Evaluate operational efficiency: Identify which areas generate the most profit or incur the highest costs

• Manage cash flow effectively: Anticipate shortfalls and set aside resources for unexpected expenses

• Plan budgets and growth strategies: Use trends from financial reports to forecast future performance

• Ensure compliance: In Hong Kong, most companies are required to prepare annual financial reports. Some may also need to submit audited financial statements depending on company type and size

Financial statements are an objective record of how your business is performing. Reviewing them regularly can help you stay compliant, stay in control, and prepare your company for expansion or funding opportunities.

3 Most Common Types of Financial Statements

A complete set of financial statements typically includes three key reports: the balance sheet, income statement (also known as profit and loss statement), and cash flow statement. Each report plays a different role and helps you understand the company's financial position from multiple angles.

Balance Sheet

The balance sheet is prepared according to standard accounting rules, which presents the company’s financial position at a specific point in time. It is structured around the accounting equation “Assets = Liabilities + Equity”, and outlines what the business owns, what it owes, and what remains as shareholder equity. 

• Assets: refer to resources the company owns, such as cash, accounts receivable, inventory, and equipment.

• Liabilities: include debts and obligations like unpaid bills, taxes, or business loans.

• Equity: represents the company’s net worth, calculated as total assets minus total liabilities.

This report acts like a snapshot of your company’s financial health. It shows whether the business is financially healthy, how much it owns, and what it needs to repay.

Income Statement

The income statement, sometimes called a profit and loss statement, summarizes the company’s revenues and expenses over a specific period, such as a month, quarter, or year. It ultimately shows whether the business made a profit or a loss.

Key components of an income statement include:

• Revenue: Sales income or service fees received by the business

• Operating costs and expenses: Costs such as rent, wages, and materials

• Net income: The remaining profit after deducting all costs, taxes, and expenses

This is one of the most frequently reviewed reports, as it reflects the company’s ability to generate profits and helps forecast cash flow and tax obligations.

Cash Flow Statement

The cash flow statement tracks the actual movement of cash in and out of the business. Even if the income statement shows a profit, the company may still face liquidity issues if cash has not yet been received. This report helps identify whether the company can cover daily expenses.

Cash flow is usually divided into three sections:

• Operating cash flow: Cash generated or used in daily business activities

• Investing cash flow: Funds related to the purchase or sale of assets like equipment

• Financing cash flow: Cash from loans, capital injections, or dividend payments

This statement is especially important when applying for business loans, as it shows whether the company has sufficient liquidity to meet short-term obligations.

How Are Financial Statements Prepared and What Are the Requirements?

Even if you work with an accountant, it is still important for business owners to understand the basic rules and responsibilities behind financial statements.This is not just about tax filing. It also affects how you handle audits, apply for financing, and manage your business more effectively.

Based on Hong Kong Accounting Standards

In Hong Kong, financial statements are usually prepared based on the Hong Kong Financial Reporting Standards (HKFRS) or the SME-FRS, issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). These are aligned with international standards and help ensure consistency and transparency.

Under the Hong Kong Companies Ordinance , all registered companies (except dormant ones) must prepare financial statements each year. If your company is not exempt, you also need to appoint a certified accountant to carry out an audit and issue an audited financial statement.

To qualify for simplified reporting, a small private company must meet any two of the following three conditions for two years in a row (note: other entities such as small guarantee companies or eligible private companies may follow different thresholds):

• Annual revenue of HKD 100 million or less

• Total assets of HKD 100 million or less

• No more than 100 employees

If your company meets these criteria, you can use the SME-FRS, which makes the reporting process easier and more cost-effective. No matter which standard you follow, your financial statements should usually include:

• Going concern assumption: Assumes the business will continue to operate

• Accrual basis: Records income and expenses when they happen, not when cash is received

• Full financial reports: Includes a balance sheet, income statement, cash flow statement, statement of changes in equity, and notes

You can prepare the statements in-house with accounting software or work with an external firm. While many SMEs do this only once a year, it’s a good idea to prepare financial reports every quarter to better track your cash flow and performance.

Limitations of Financial Statements

While financial statements are essential tools for business management and auditing, they also have certain limitations. Being aware of these blind spots can help SME owners make more informed financial decisions.

• Based on historical data and may lag behind real-time changes: Financial statements are typically prepared quarterly or annually. They reflect past performance, not the company’s current cash flow or market conditions. Relying only on these reports may cause a delay in responding to urgent business changes.

• Influenced by accounting policies and subjectivity: Companies can choose different accounting methods, such as how inventory or depreciation is calculated. These choices directly affect net income and asset values, and can make it difficult to compare financial reports across companies.

• Do not capture intangible or non-financial factors: Factors like brand value, employee retention, or customer loyalty are crucial to long-term success, but are hard to quantify and are not reflected in financial reports.

• May not reveal underlying risks or manipulation: Some companies may use accounting techniques to delay expense recognition or record income earlier to make their statements look better. Without careful auditing, financial reports may not fully reflect the company’s true risk exposure.

Simplify Financial Reporting with Aspire

For many SMEs, preparing financial statements can be time-consuming and error-prone. It often involves manual data entry, file matching, and back-and-forth coordination with accountants. Aspire offers an all-in-one digital finance platform that automates the reporting process from daily transactions to financial statements, helping businesses save time and improve accuracy.

Seamless Integration with Accounting Tools

Aspire integrates directly with popular accounting software like Xero and QuickBooks, allowing your daily transaction data to sync automatically into your reports. This eliminates repetitive manual entry, reduces the chance of errors, and saves valuable time—making your financial reporting process faster and more efficient.

Aspire AI Helps You Understand Financial Data

Beyond integration, Aspire's Business Account also provides an AI-powered financial analysis features. It helps you spot spending patterns, forecast cash flow, and generate summary reports in real time. This tool is especially useful for SMEs without a full in-house finance team, offering quick insights for better decision-making.

Frequently Asked Questions About Financial Statements

Why Do I Need Financial Statements?

Financial statements are essential tools for evaluating your company’s financial position and operational performance. Whether you are filing taxes, applying for funding, making business decisions, or presenting your company to banks and investors, clear financial reports are key. For SMEs, preparing financial statements regularly also helps you monitor cash flow, control costs, and improve financial transparency.

What Are the Three Types of Financial Statements?

A full set of financial statements typically includes the following three reports:

• Balance sheet: Shows the company’s financial position at a specific point in time, including what it owns and what it owes

• Income statement: Also known as a profit and loss statement, it records revenue and expenses over a period and shows whether the company is making a net profit

• Cash flow statement: Tracks the inflow and outflow of cash, helping you understand if your business has enough funds to meet daily operating needs

How Often Should I Prepare Financial Statements?

Under Hong Kong law, most companies are required to prepare financial statements at least once a year. However, it is recommended that SMEs review their financial reports quarterly. Doing so helps identify issues early, supports better planning, and provides updated financial data when applying for loans or engaging with investors.