What are Financial Statements? Its features, objectives, types, uses

 

Financial statements are the statements and reports which convey the financial performance and financial position of a business enterprise. Financial statements include income statement, statement of retained earnings, balance sheet, cash flow statement and Notes to financial statements which convey the financial performance and position of any business enterprise.

What are the Financial Statements? 

Financial statements are the reports and statements issued by management to the users of financial information such as creditors, investors, shareholders, government, public to communicate financial performance and position of the business organisation.  Financial statements includes income statement, statement of shareholders equity, balance sheet, cash flow statement and Notes (disclosures) to financial statements. Generally Financial statements are prepared at the end of the financial year to disclose the financial performance and position. Income statement also called profit and loss statement is prepared to disclose the financial performance of the organisation. Statement of changes in equity or statement of shareholders equity is prepared to know the change in equity balance at the end of the financial year. Balance sheet is prepared to disclose the financial position as on a particular date. Cash flow statement is prepared to know the change in cash and cash equivalents balance at the end of the financial year.

General Purpose Financial Statements:

 The General Purpose Financial statements are basic four financial statements such as Income statement, Statement of Shareholders equity, Balance sheet, Cash flow statement and Notes to financial statements which provides financial performance and position of the business organisation to investors, creditors, debtors, shareholders, government, public. Financial statements shall comply with the GAAP which is Generally Acceptable Accounting Principles and International Financial Reporting Standards and relevant statute and Laws of the nation. Financial statements shall be prepared and presented by management to give True & Fair view of the state of affairs of the company.

True & Fair view:

Financial statements shall give True and Fair view of state of  affairs of the company. It means Management shall prepare financial statements in accordance with the relevant Accounting Standards, Financial Reporting Standards, Prudent commercial practices, adhere to Accounting Policies consistently and Accounting principles and a disclosure of Material items as Foot notes in Notes to Accounts.

 

What are the different types of financial statements?

1. Income statement 

Income statement is also called profit and loss statement is prepared know the profit or loss for the year of business entity. Income statement depicts financial performance as profit earned or loss incurred for the year by business entity. Income statement has revenues, incomes and expenses and losses which give profit or loss for the year.

2. statement of position or Balance sheet

Statement of position or Balance sheet depicts the financial position of the business entity. Financial position is the assets and liabilities position of company. Balance sheet has Assets and Liabilities. Assets are the economic resources which yield economic benefits. Liabilities are the debts and dues of the business entity

3.statement of shareholders equity or statement of change in equity

Statement of change in equity depicts the change in equity balance at the end of the year as compared to beginning of the year. Statement of shareholders equity is the result of balance sheet and income statement. The statement gives movement in equity balance and retained earnings and shareholders contribution

4. Cash flow statement

Cash flow statement shows the movement in cash and cash equivalents at the end of the year. The statement discloses cash and cash equivalents balance at the end of the year. cash and cash equivalents are highly liquid assets which are easily convertible into cash

5. Notes (disclosures) to financial statement

Notes to accounts are foot notes which is used to disclose the Accounting policies used in preparing income statement and balance sheet. Notes to accounts are explanation to the accounts in the balance sheet. Notes to financial statements explains about the accounting policies used in valuation of inventory and method of  depreciation used in fixed assets and  disclosure of other material items 

What is the objective of preparing Financial statements?

The basic objective of preparing and presenting financial statements is to convey the financial performance and financial position and cash flow of the business entity to management, investors, creditors, government and public in general. Financial statements needs to comply with the GAAP which is Generally Acceptable Accounting principles and relevant Financial Reporting Standards and Statute or laws of the nation. Financial statements are prepared by Management as per Accounting standards and Accounting policies and Accounting principles and statute or the relevant Laws

Statutory Audit by Chartered Accountant as per statute or Law:

Every company form of organisation shall get its Financial statements audited by Chartered Accountant or relevant authorized professional accountant as per the statutory requirements or the Laws of the nation. Audit is an independent examination of financial information contained in financial statements to ensure that financial statements are prepared and presented in accordance with the relevant Financial reporting standards and statutory requirements and financial statements give true & fair view of state of affairs. Auditor shall issue Audit report of the audited financial statements.

Conclusion: 

Financial statements plays vital role to depict the financial performance as profit earned or loss incurred and financial position as assets or liabilities position and cash flow to the users of financial information.

 

Related blogs:

What is Journal? Its features, types, Objectives and uses

What are Ledgers? 

What is Trial Balance?

What is Income Statement (Profit and loss a/c)?

What is Balance Sheet (Position Statement)?

What is Cash Flow Statement?

What is Bookkeeping? Its features, objectives, uses?

What are Subsidiary Books? Its features, types, objectives, uses

What is Single Entry System? Its features, types, objectives, uses

What is Double Entry System? Its features, objectives, uses