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Financial Statements and Nature of Financial Statements

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Financial Statements

Financial statements are the final product work done during the accounting period which shows the financial positing and result of business activities for that accounting period. These statements are the basis and formal means through which the corporate management communicated finical information to various external users which include investors, tax authority’s government employees etc

Nature of financial statements 

(i) Recorded facts financial statements are prepared on the basis of facts recorded in the book of account 

(ii) Accounting conventions preparation of financial statements is based on certain accounting conventions such as convention of valuing inventory at cost or market price whichever is less is followed.

(iii) Postulate/basic assumption certain basic assumptions (per –requisites) known as postulates such as going concern postulate money measurement postulate are followed while preparing financial statements.

(iv) Personal judgments preparation of financial statements are also based on personal opinion estimates and judgments to value closing stock at cost or market price whichever is lower is a personal judgement or to make a choice between the different methods of charging depreciation straight line Vs diminishing balance method.

Objective of financial statements

(i) To provide information about economic resources and obligations of a business.

(ii) To provide information about the earning capacity of the business.

(iii) To provide information about cash flows.

(iv) To judge effectiveness of management.

(v) Information about activities of business affecting the society.

(vi) Disclosing accounting policies.

Uses and importance of financial statements 

(i) Report on stewardship function 

(ii) Basis for fiscal policies

(iii) Basis for granting of credit 

(iv) Based for prospective investors

(v) Guide to the blue of the investment already made

(vi) Aids trade associations in helping their member

Limitations of financial statements

(i) Do not reflect current situation.

(ii) Assets may not rely the value stated in balance sheet.

(iii) Bias.

(iv) Detailed information is not provided

(v) Vital information missing

(vi) No qualitative information.

(vii) They are only interim reports.

Types of financial statements

The term financial statements generally includes two statements

(i) Profit & loss account or income statement: the profit &loss A/c is also called income statement. Italic includes trading a/c as well ti is the accounting report which shows the revenues expenses and difference between then represents net profit or net loss for a specified accounting period.

(ii) Balance sheet: the statement which shows total of assets and liabilities is known as balance sheet the purpose of balance sheet is to show its resources and obligations for acquiring these resources assets and liabilities. It is also termed as position statements. 

Financial statements of companies

The preparation and presentation of the final accounts of a company are governed by the provision of Indian companies act 1956 as per syllabus we are restricted to balance sheet only. 

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