what are the characteristic features of financial statements?

Are you curious to explore the characteristic features of financial statements? Let's dive right into it. Here, we will briefly examine the characteristic features of financial statements.

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 the financial performance, position, cash flow of the business organisation. The main objective of financial statements is to provide the information about the financial performance, position, and cash flow of the enterprise that would be helpful for users to make economic decisions.

  Financial statements include income statement, statement of changes in 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.

 An income statement, also called a profit and loss statement, is prepared to disclose the organisation's financial performance. A statement of changes in equity or statement of changes in shareholders' equity is prepared to know the change in equity balance at the end of the financial year. The balance sheet is prepared to disclose the financial position as on a particular date. A 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 a True and Fair view of the state of affairs of the company. It means Management shall prepare financial statements in accordance with the relevant Accounting Standards, Financial Reporting Standards, and Prudent commercial practices. These statements shall apply the Accounting Policies consistently, and comply with Accounting principles. Also, there should be the disclosure of Material items as Foot notes in Notes to Accounts.

What are the qualitative characteristics of financial statements?

The qualitative characteristics are the attributes that enhance/improves the usefulness of the information provided in financial statements. The framework suggests that the financial statements should maintain four qualitative characteristics as far as possible.

The four qualitative characteristics of financial statements are as follows

1. Understandability

Financial statements should be presented in such a manner that the information should be easily understandable by the users within the reasonable knowledge of business and accounting. The information contained in it should be easily read, and understood by users for making useful decisions

2. Relevance

Financial statements should contain relevant or material information. The information is said to be material if it influences the economic decision of the users. Such relevant information may be helpful for the users to evaluate the past, future, and present events. Also, this information may be helpful for users in correcting the evaluations

Similarly, the information should also be reported timely. If there is a delay in reporting the information, this information may lose its relevance.

3. Comparability

Financial statements should permit or allow to make the inter-firm and intra-firm comparisons. Comparison of financial statements of the same/different firms is one of the effective tools for financial analysis. This comparison helps to make financial analysis and conclude the operational performance in terms of profitability.

4. Reliability

The information contained in the balance sheet, profit and loss account, and cash flow statement must be reliable and trustworthy. The information is said to be reliable if it is free from material errors, misstatements, and bias. The information must be complete. Prudence must be exercised while recording or reporting transactions or events. Transactions and events recorded should be free from bias or material errors.

What are the features of Financial Statements?

The following are the features listed below.

1. Financial statements are the reports or statements prepared by management to depict the financial performance, position and cash flow of the enterprise

2. It includes profit and loss account, balance sheet, statement of changes in equity, cash flow statement, and notes to accounts/ disclosures prepared at the end of the accounting year

3. The information contained in these statements should be reliable, relevant/material, understandable and comparable to users to make useful decisions. Users include creditors, debtors, competitors, government, shareholders, investors, and management.

4. These statements should be prepared by management in accordance with the Generally Acceptable Accounting Principles or relevant accounting standards and policies as applicable

5. These statements contain 5 elements. They are Assets, Liabilities, Income, Expenses, and Capital/Equity

6. Financial statements are prepared using Historical Cost as per the applicable accounting standards. For example, Alpha ltd purchased machinery for $1000 which is the historical cost.

7. These statements disclose both facts and opinions. These statements are affected by the judgement of the professional accountants

8. Users believe that these statements were prepared considering Fundamental Accounting Assumptions. These assumptions are Going Concern, Accrual basis of accounting, and Consistency. It is assumed that financial statements are prepared on the accrual basis of accounting. Accounting policies were consistent from one period to another period. Business enterprise will continue its operations in foreseeable future.

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

Conclusion

Finally, the characteristic features of financial statements are explained in simple terms. To summarise the financial statements are the reports that include profit and loss account, balance sheet, cash flow statement, and Notes to accounts prepared at the end of the period. The information contained in these statements should be reliable, relevant, understandable and comparable to the users 

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