Financial Statements

Financial statements are a set of documents that show your company’s financial status at a specific point in time. They include key data on what your company owns and owes and how much money it has made and spent.

There are four main financial statements:

balance sheet
income statement
cash flow statement
statement of retained earnings

Financial statements may be prepared for different timeframes. Annual financial statements cover the company’s latest fiscal year. Companies may also prepare interim financial statements on a monthly, quarterly or semi-annual basis.

Interim statements sometimes include fewer components than year-end statements. For example, they may lack a cash flow statement and a statement of retained earnings.

Financial statements are comprehensive reports that showcase a company’s financial performance and position. They are primarily of three types:

Income Statement (Profit and Loss Statement): This statement highlights a company’s revenues, expenses, and net income (or loss) over a specific period.
Balance Sheet (Statement of Financial Position): The balance sheet presents the company’s assets, liabilities, and equity at a given point in time.
Cash Flow Statement: This statement tracks the inflow and outflow of cash within the business.

Types of Financial Statements

1. Income statement

Income statement of an organisation or business entity is the financial statement which contains financial information about the three important components, which are revenues, profit or loss and expenses incurred during the accounting period.

The three components of income statement are explained as follows:

Revenues: It refers to the sales of goods and services that the business generates during the current accounting period. Revenues can be obtained from both cash and credit sales.
Profit or Loss: Profit or loss is the net income which is obtained by deducting the expenses from the revenues. Profit will happen if revenues are more than expenses and loss will occur if expenses are more than revenue.
Expenses: Expenses are the cost of operations that an organisation incurs for running day to day operations. They can be administrative expenses like salaries, depreciation etc.

2. Balance sheet

A balance sheet is known as a statement of financial position as it shows the position of assets, liabilities and equity at the end of an accounting period. The net worth of a business can be determined by deducting the liabilities from the assets.

If the users of financial information are looking for information regarding the financial position of the company, a balance sheet is the most appropriate statement which will present the necessary information.

Components of a balance sheet are assets, liabilities and equity. These are described below:

a. Assets: Assets are resources that are owned by the company both legally and economically. There are two main classes of assets. They are current and non-current assets.

Current assets of a company are those assets that are going to be utilised in the current accounting period. The examples of current assets are cash, marketable securities, cash equivalent etc.

Non-current assets comprise of those assets that cannot be utilised completely in the current accounting period and are therefore used across several accounting periods. It consists of tangible and intangible assets including machinery, building, land, computer equipment, vehicles etc.

Assets are equal to the sum of liabilities and equity of the organisation.

b. Liabilities: Liabilities are obligations of a company which they owe to other businesses or individuals. It includes interests payable, loans, taxes etc. Liabilities are of two categories current liabilities and non-current liabilities.

Current liabilities are due within a year that means the organisation has to pay the dues within that accounting year only. Non-current liabilities, on the other hand, are obligations that have a longer period of repayment, which is more than twelve months. For example, a long term lease which is due in more than twelve months.

c. Equity: Equity is defined as the difference between assets and liabilities. The examples of equity are retained earnings, share capital. Equity can be calculated by subtracting assets from liabilities.

3. Statement of Cash Flow

Cash flow statement reveals the movement of cash in an organisation. It comprises cash inflows and outflows. Cash flow can be classified into three activities which are operating activities, investing activities and financing activities.

4. Notes to Accounts

Notes to accounts or notes to financial statements are supporting piece of information that is provided along with final accounts of a company. Notes are required to be provided as per the law which can include details regarding reserves, provisions, inventory, depreciation, share capital etc.

Importance of Financial Statements

Owners, Managers, and Employees-Financial statement helps them to take important financial decisions that will ensure an entity’s continued operations.
Investors/Potential Investors-These financial statements help the potential investor to know whether to invest in an entity or not. In a case if he wants to then how much amount shall be invested can easily analyzed using these financial statements.
Financial Institutions-Based on these financial statements, financial institutions decide whether to grant loans to an entity that may be needed by them to meet working capital needs or for expansion.

Objectives of Financial Statements

Financial statements are prepared to provide information that suits the common needs of all users. Users of financial statements could be any of the following:

Investors
Employees
Lenders
Suppliers and other trade creditors
Customers
Government and their agencies
Public

Accounting Assumptions-It is recommended that financial statements are prepared in accordance with the established assumptions. Here’s an overview of the same.
Going Concern -In this case, the financial statements are usually prepared on the assumption that the entity will continue functioning in the foreseeable future, and neither there is an intention, nor a need to materially curtail the scale of operations.
Consistency-This assumption specifies the use of identical accounting policies for similar accounting transactions in all accounting periods. Such a practice makes way for easier comparison of financial statements. Accounting policies, if in need of a change, can be modified by a statue or accounting standard, given the need for more appropriate financial statements.
Accrual Basis of Accounting-Termed as the most logical approach in determining profit, accrual basis of accounting is an assumption where transactions are recognized immediately after their occurrence. Accrual basis warrants better matching between revenue and cost. Very importantly, profit/loss on this basis reflects activities of the enterprise during an accounting period, in contrast to the cash flow basis where noting but cash flows are generated.
Qualitative Characteristics-Qualitative characteristics enhance the usefulness of information provided in a financial statement. The following are the qualitative characteristics that a financial statement must adhere to:
Understandability-The presentation of financial statements must be lucid and concise, to the extent that a person with reasonable business knowledge can decipher. Too much of information, especially the irrelevant ones make a statement clumsy. However, non-disclosure of vital information must be avoided.
Relevance-The financial statements must only reveal the information which influences the economic decisions of the users. Information of that kind may assist the user in evaluating past, present and future events, or on the other hand help in confirming or correcting past evaluations.

Uses of Financial Statements

1. Bridging the Gap in Management

Basically, the use of a financial statement is to show the financial performance of an organization. It shows the assets, liabilities, profit and loss of an organization during a period of time. They show how fruitful the decision of an organization has been. Since investors approach these financial statements of any indian company , they can determine the performance of the company easily. This further helps in bridging the gap between planning and results.

2. Availing Credit from Lenders

Each business needs to acquire assets for working. For this reason, they need to depend on loans like banks and financial institution. And in loan approval, financial statements play a very crucial role. Since they demonstrate an organization’s liabilities, profits and losses, investors can utilize them to settle on decisions that are informed.

3. Use for Government

Government rely on these financial statements to frame governmental policies for corporates. As these statements show how the companies are working. The administration can utilize this data to assess the tax and to form strategies or policies.

4. Use for Investors

Investors likewise broadly utilize financial statements to access the funds of an organization. That encourages them to know how the organization’s dissolvability will be. In this way, the better financial position of an organization will attract greater investments.

5. Use for Stock Exchanges

SEBI and the stock exchanges like BSE and NSE also utilize financial statements of Indian companies for various reasons. SEBI can survey an organization’s internal matter utilizing them to guarantee the protection of investors. And to frame their quotes even stock advisors needs these financial statements. They are likewise an extraordinary wellspring of data for stockbrokers and financial specialists.

6. Information on Investments

The investors of an organization depend on these financial statements to see how their investments are performing. In a case, if the organization is profitable there are chances that it may invest more money. On the other hand, investors can even withdraw the amount invested once they see losses or stagnant profits.

FAQs

1. Why Are Financial Statements Important?

Financial statements are essential for various stakeholders:

Investors: They use financial statements to assess a company’s profitability and growth potential.
Creditors: Lenders use financial statements to evaluate a company’s creditworthiness.
Management: Busi

2. How Often Are Financial Statements Prepared?

Companies typically prepare financial statements quarterly or annually. However, monthly statements are common for internal monitoring.

3. Are Financial Statements Only for Large Corporations?

No, financial statements are relevant for businesses of all sizes. Even small businesses benefit from tracking their financial performance and making data-driven decisions.

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