Financial Statements – Types, Objectives, Components
- Account & Audit|Blog|
- 1204 Views
- 4 Min Read
- By Taxmann
- Last Updated on 4 March, 2023
1. What are Financial Statements?
Financial statements are statement which provides net results from operations, cash flows from various activities and financial position of the company for a particular year. Financial statements should be prepared using globally acceptable accounting principles (such as Ind AS or AS in India) that makes these financials easy to understand and have wider acceptability.
2. Types of Financial Statements
1. Balance sheet;
2. Statement of profit and loss, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
3. Cash flow statement;
4. Statement of changes in equity (if applicable) and;
5. Any explanatory notes annexed to, or forming part of, any document referred to point (1) to (3) above.
3. Objectives of Financial Statements
Financial statements are prepared with an objective to provide information about the financial position of the entity, performance and changes in financial position of an entity, cash flows during the year to help users in comparing results and making economic decisions.
4. Components of Financial Statements
4.1 Balance Sheet
Balance Sheet is a statement that shows the net worth at the end of financial year i.e. March 31, 20XX. Balance sheet contains:
Assets in balance sheet shows the amount of assets an entity holds on the date of balance sheet.
Liabilities in balance sheet shows the amount of liability an entity is liable to pay in future (determined on the date of balance sheet).
4.4 Equity & Reserves
Equity and reserves is the amount of capital entity has including reserves balances, if any. Higher amount of equity and reserves indicate higher net worth of the entity.
5. Statement of profit and loss or income and expenditure account ( as the case may be ) for the financial year
A company prepares statement of profit and loss to show the net result (profit or loss) from the revenue earned and expense incurred. In case of a company carrying on activity not for profit, income and expenditure account is prepared for the financial year which shows the income earned and expense incurred during the year, showing surplus (when income is more than expense) or deficit (when expense is more than income). The main purpose is to know how much profit or loss the entity has made during a particular year.
6. Cash flow statement for the financial year
Cash flow statements reports the sources of cash and uses of that cash. Cash flow can be generated from/ used in the following activities:
6.1 Operating Activities
Cash from operating activities focuses on the cash inflows and outflows from a company’s operations such as purchase, sale, money received from debtors, paid to creditors etc.
6.2 Investing Activities
Cash flow from investing activities are cash flow arising from investment gains or losses and changes resulting from amounts spent on investments in capital assets. Example: purchase of plant, interest income on investment, etc.
6.3 Financing Activities
Cash flow from financing activities are cash cost or receipts received from external activities that allow a firm to raise capital. Example: issue of shares or debentures, redemption of bonds, etc.
7. Statement of changes in equity ( If applicable )
Statement of changes in equity is statement that shows reconciliation of beginning and ending balances in a company’s equity during a reporting period. It represents any change in equity that took place during the year. Any explanatory notes annexed to, or forming part of, any statement referred above These are working notes or information that are relevant and are required to be disclosed in relation to any of the statements discussed above. These are critical to identify the additional information relating to an entity. Explanatory notes contain details about the transactions (accounted and not accounted but disclosed).
8. Repository of Financial statements at Single place
Taxmann’s accounts and audit module accountsandaudit.taxmann.com contains repository of financial statements of key industries. Repository of Financial Statements can be accessed here.
9. Importance of Financial statements to various users
Audited financial statements can be of great importance to various groups such as discussed below:
9.1 Importance to Management
Financial statements help the management to understand the position, progress and prospects of business by providing upto date accurate and systematic financial information. It enables management to formulate appropriate policies and courses of action for the future. By comparative analysis of financial statements, management can know the progress and position of entity and make suitable changes in the policies to prevent adverse situations in future.
9.2 Importance to Shareholders
Results of company’s activities are reported to shareholders at the annual general body meeting in the form of financial statements. Financial statements help shareholders to know about the efficiency and effectiveness of management and financial strength and earning capacity of the company.
9.3 Importance to Lenders or Creditors
Before lending loan or providing credit, lenders or creditors check the credit worthiness of company or entity and the financial statements serve as a useful guide for the present and future liquidity, profitability and long-term solvency position of a company on the basis of which loans or credit are provided by such lenders or creditors.
9.4 Importance to Public
Published financial statements helps various groups of society such as financial analysts, lawyers, trade associations, trade unions, financial press, research scholars, teachers, etc. (which are not directly connected with business) to know the position, progress and prospects of a business entity. These groups are generally interested in analysing, judging and commenting on business entity.
Accounting Rules – What are the Golden Rules of Accounting?
Indian Accounting Standards
IFRS – International Financial Reporting Standards
Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.
Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.
The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:
- The statutory material is obtained only from the authorized and reliable sources
- All the latest developments in the judicial and legislative fields are covered
- Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
- Every content published by Taxmann is complete, accurate and lucid
- All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
- The golden rules of grammar, style and consistency are thoroughly followed
- Font and size that’s easy to read and remain consistent across all imprint and digital publications are applied
Comments are closed.