Financial Statements

By | April 18, 2020

Financial statements are the end product of an accounting process. Financial statements are historical and are prepared by following the accounting concepts and principles.

According to John N Myer, “Financial statements provide a summary of accounts of business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and income statements showing the results and operations during a certain period.”

A set of financial statements as per Section 2(40) of the Companies Act, 2013 includes:

Balance Sheet: It is a statement of assets and liabilities, showing the financial position of an enterprise at a given date. It is also known as a position statement.

Statement of Profit and Loss: It shows the net result of business operations during an accounting period. It is also known as an income statement.

Cash Flow Statement: It is a statement prepared by AS-3 to show inflow and outflow of cash and cash equivalents.

Statement of Changes in Equity: It shows changes in equity during a year.

Notes to Accounts: It is any exploratory note annexed to any documents referred above.

Objectives of Financial Statements:

  • The companies prepare financial statements to provide information about the earning power of the company to the prospective investors, government, customers, regulators, lenders and suppliers.
  • It is also prepared for self-analysis and learn how the company has performed in the preceding year. The aim is to collect and present the financial data in a prescribed format that helps the firm in comparing with other firms and planning for the future.
  • The effectiveness of the workforce and management can be easily judged by comparing the past performance with the company standards and industry standards.

Parties Interested in Financial Statements:

The users of accounting information can be internal or external, which are as follows:

Internal users:

They are parties within the firm. They include:

Owners: They are the owners/proprietors/partners of the firm who have supplied funds to the company. Thus, they use financial statements for learning about the performance of the company.

Management: They are the stewards of the investors as they engage in significant decision-making. They use financial statements for learning and analysing the reports for improving in future.

Employees: The salaries and incentives of the employee are directly related to the profits earned by the company for the said years. Hence, they use financial statements for learning the financial health of the company and their job security.

External Users:

They are the parties outside the company. They include:

Investors: They comprise of current shareholders and also future investors. Prospective investors look at the financial strength of the company exile, deciding about the investments.

Financial Institutions and Banks: They provide loans to the business. Hence they rely on financial statements for learning the credibility of the companies.

Suppliers and Creditors: They are the lenders of funds. Hence, they see the reliability of the business, whether their loans will be repaid or not.

Government: It is required by various departments of the government, e.g. for calculation of tax liability or CSR activities.

Consumers: They use financial statements to see whether the company is sustainable in providing good quality products.