Financial statements are the end product of the accounting process. Financial statements are historical in nature and are prepared by following the accounting concepts and principles.
According to John N Meyer, "Financial statements provide a summary of accounts of business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and income statement showing the results and operations during a certain period."
A set of financial statements as per Section 2(40) of the Companies Act, 2013 includes
Balance Sheet: It is a statement of assets and liabilities, showing the financial position of an enterprise at a given date. It is also known as a position statement.
Statement of Profit and Loss: It shows the net result of business operations during an accounting period. It is also known as an income statement.
Cash Flow Statement: It is a statement prepared according to AS-3 to show inflow and outflow of cash and cash equivalents.
Statement of Changes in Equity: it is a statement prepared according to AS-3 to show inflow and outflow of cash and cash equivalents.
Notes of Accounts: It is an explanatory note annexed to any document referred to above.
Objectives of Financial Statements:
- The companies prepare financial statements to provide information about the company's earning power to the prospective investors, government, customers, regulators, lenders, and suppliers.
- It is also prepared for self-analysis and learning how the company has performed in the preceding year. The aim is to collect and present the financial data in a prescribed format that helps the firm compare with other firms and plan for the future.
- The effectiveness of the workforce and management can be easily judged by comparing past performance with the company standards and industry standards.
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