Financial statement occupies an important place in the data and knowledge base of accounting. It is the source of all kinds of accounting information in the organization.
The financial statement is prepared by taking into consideration all the persons belonging to the organization so that they can get all the information they need from the financial statements.
Today we are going to learn :
- What is the financial statement?
- The purpose or objective of the financial statement and
- The statements included in the financial statement.
So let’s get started.
What is Financial Statement?
Financial statements are a bunch of accounting information that gives a picture of the organization’s performance and financial situation to its owners and interested parties.
Financial Statements reports issued by companies with a view to providing information on their financial health and recent results.
The purpose of this statement is to provide investors, prospective investors, analysts, and all other interested parties with financial information as clearly and accurately as possible.
Purpose or Objective of Financial Statements
Financial statements are one of the most important sources of business information. The financial statements provide the necessary information to the various parties involved in the business. As a result, financial statements have a much greater particular importance.
The financial statements have the following purposes or objectives:
1.Business budgeting and planning:
Businesses prepare different types of budgets, such as purchase budgets, sales budgets, production budgets, marketing budgets, administrative expenditure budgets, cash budgets, and, most importantly, master budgets and various types of plans, to run the business smoothly.
Businesses require various financial data to prepare these budgets and plans. For example, The financial statements provide all information related to last year’s income-expenditure, purchase-sale, assets, liabilities, and ownership.
Budget makers and plan makers use this type of financial data for making budgeting and planning.
2. Determining the current and long term liabilities of the organization:
It is frequently necessary to determine the organization’s current and long-term liability.
The ratio of current assets, current liabilities, long-term liabilities, and ownership elements in financial statements helps to verify the financial well-being and debt repayment capacity of the organization.
Once the institution is satisfied with its financial well-being, creditors, bankers, and potential investors can decide on their lending activities.
3. Lender decision making:
Lenders consider various factors before granting a loan to an institution, including the institution’s financial viability, ability to repay the loan on time, and the business’s reputation.
Lenders decide whether or not to approve a loan after reviewing the business organization’s financial statements at various times.
4. Dividend declaration decision:
When the financial statements are ready at the end of the fiscal year, shareholders are eager to receive dividends.
The business organization’s managing authority must determine how much dividend can be paid, whether dividends can be paid at all, what the dividend rate will be, how much of the profit will be paid as dividends, and how much will be left for the business.
Financial statements help to make necessary decisions in these situations.
5. Assist in tax assessment:
The business entity regularly submits the audited financial statement to the tax authority.
It is routine work of the business organization. The tax authority determines the tax by examining the financial statements in the light of its point of view.
The use of financial statements is essential for tax assessment. The tax authorities review and use the financial statements to determine income tax, value-added tax, sales tax, and other multiple taxes.
6. Formulation of industry and trade policy of the government:
The government earns income from various sources and spends that income in various sectors of state administration.
Thus, the government analyzes various government and non-government organizations’ financial statements in formulating import policy, export policy, industrial policy, trade policy, tax, and revenue policy.
We can say that the business owners, shareholders, managing authorities, lenders, creditors, bankers, and the government benefit in many ways from using financial statements for multiple purposes.
Therefore, in the age of modern globalization, the importance of financial statements is immense, and their use is increasing.
Components of Financial Statements
A financial statement is referred to as a statement that provides financial information for internal and external users.
Companies prepare four financial statements based on the summarized accounting data.
Explanatory notes, supporting schedules, and supporting notes are included in every financial statement.
The components of financial statements are as follows:
- Income statement
- Owner’s equity statement
- Balance sheet
- Statement of cash flow
These statements provide financial information relevant to internal and external users.
1. Income Statement
An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time.
The income statement records revenue and expenses for a specific period of time.
The income statement first lists the revenues and then the expenditures. The statement then shows net revenues (or net losses).
Net income results when revenues exceed expenditure. When expenditure exceeds revenue, there is a net loss.
Note that in calculating net income the income statement does not include investment or withdrawal between the owner and the company.
Sample of Income Statement:
2. Owner’s Equity Statement
The equity statement of an owner summarizes the changes to the equity of an owner over a certain period.
The owner’s equity statement reports for a specific period of time changes in the owner’s equity. The time period shall be the same as that covered by the statement of income.
The Owners Equity Statement is generated with the data from the Income Statement.
The first line of the statement shows the initial equity amount of the owner. The investments of the owner, net income (or loss), and drawings of the owner then come.
This statement shows why the equity of the owner has increased or fallen during the period.
If the owner makes more investments, the business shall report them as investments in the equity statement of the owner.
Sample of Owners Equity Statement:
3. Balance Sheet
At a certain date, a balance sheet reports the assets, liabilities, and equities of the owner.
The company prepares the balance sheet from the column headings of the tabular summary and the month-end data displayed in its final row.
Note that the balance sheet lists assets at the top, followed by liabilities and equity of the owner. Total assets must be equal to the total liabilities and equity of the owner.
The balance sheet is an overview of the financial condition of the company at a certain time (usually at the end of the month or year).
Sample of Balance Sheet
4. Statement of Cash Flow
A cash flow statement contains information about cash inflows (receipts) and outflows (payments) for a given period of time.
The cash flow statement provides information about cash receipts and payments over a given period of time.
The Cash Flow Statement reports
- Cash effects of a company’s operations over a period of time.
- Investment transactions.
- Financing transactions.
- Net increase or decrease in cash over a period of time, and
- Cash at the end of the period.
It is useful to report sources, uses, and money changes because investors, creditors, and others want to know what happens to the liquid resources of a company.
The cash flow statement provides answers to the following simple, but significant questions.
- During this period, where did the cash come from?
- What was the amount of cash used in that period?
- What has changed the cash balance over the period?
Sample of Cash Flow Statement
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