Financial Statements

 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.

Parties (Users) Interested in Financial Statements:

The users of accounting information can be internal or external, which are as follows:

Internal Users:

They are the parties within the firm. They include
Owners: They are the firm's owners/proprietors/partners who have supplied funds to the company. Thus, they use financial statements to learn about the performance of the company.
Management: They are stewards of the investors as they engage in significant decision-making. They use financial statements for learning and analyzing the statements for improvements in the future.
Employees: The salaries and incentives of the employee are directly related t the profits earned by the company for the said years. Hence, they use financial statements to learn about the company's financial health and job security.

External Users:

They are the parties outside the company. They include
Investors: They comprise current shareholders and also future investors. Prospective investors look at the financial strength of the company exile decide about the investments.
Financial Institution and Banks: They provide loans to the business. Hence they rely on financial statements to learn the credibility of the companies.
Suppliers and Creditors: They are lenders of funds. Hence, they see the reliability of the business whether their loans will be repaid or not.
Government: It is required by various government departments, e.g., for calculation of tax liability or Corporate Social Responsibility (CSR).
Customers: They use financial statements to see whether the company is sustainable in providing good quality products.

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