Introduction to Financial Statements

Introduction to Financial Statements

Any join stock company or corporation has established with its own a legal entity and performs various business activities for the purpose of earning profits. There are a number of stakeholders includes shareholders, BOD, management of the company, Government agencies, creditors, etc. who are keen to know about the results of its financial activities performed during a certain period of time. Therefore, in order to communicate the results of business operations and financial position to its stakeholders, the company prepares and publishes the statements of its financial affairs on a periodic basis. The entire financial activities has published though the documents called Financial Statements.

Meaning of Financial Statements

The financial statements are written reports of a financial affairs of a company. It include its trading and profit and loss account known as Income Statement, Balance Sheet, and Cash Flow Statements.

Financial Statements

To known about its components please click here:

  1. For Income Statement : It summarizes the results of company's operation for specific period of time.

  2. For Balance Sheet : It summarizes the company's assets, liabilities and capital at specific period of time.

  3. For Cash Flow Statement : It shows the frequency status of cash inflows and outflows in a specific period of time.

*Statement of Changes Equity: It is also one of the component of financial statement but it is required for company not for sole proprietorship and partnership firm. It is the reconciliation of beginning and ending equity of the company by adjusting retained earning and reserve and surplus of the company. It is a part of balance sheet as a share capital section preparing separately to their stakeholders and adding the summary value of this statement inside the balance sheet under share capital section.

Importance of Financial Statements

Financial statements provide valuable information to various users for different purposes. The following importance of financial statements are listed as follows:

  • It provides the information about net profit, earning per share, capital, assets etc. in comparison with previous data.

  • It provides the information relating to the chance of business promotion and capacity of business.

  • It provides information to its employees relating to chance increments of salary, bonus, ob security, employees welfare schemes etc.

  • It provides the information to the government to know the amount of tax on the revenues.

  • It provides the information to the creditors and bankers and other financial institutions to know the capacity to repay the amount and interest as and when repayment become due.

Conclusion

The financial statements are written reports of a financial affairs of a company. It include its trading and profit and loss account known as Income Statement, Balance Sheet, and Cash Flow Statements. Statement of changes equity the reconciles the beginning and ending equity of the company. Financial statements provide valuable information to various users for different purposes.

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