Financial statements are a collection of summary-level reports about an organization's

financial results, financial position, and cash flows. The standard contents of a set of financial
statements are:

Income statement. income statement, also called the profit and loss statement, is a report
that shows the income, expenses, and resulting profits or losses of a company during a specific
time period. The income statement is the first financial statement typically prepared during
the accounting cycle because the net income or loss must be calculated and carried over to the
statement of owner’s equity before other financial statements can be prepared. There are two
different groups of people who use this financial statement:

Internal users and external users. Internal users like company management and the board of
directors use this statement to analyze the business as a whole and make decisions on how it is run.
For example, they use performance numbers to gauge whether they should open new branch, close
a department, or increase production of a product.

External users like investors and creditors, on the other hand, are people outside of the company
who have no source of financial information about the company except published reports.
Investors want to know how profitable a company is and whether it will grow and become more
profitable in the future. They are mainly concerned with whether or not investing their money is
the company with yield them a positive return.

Competitors are also external users of financial statements. They use competitors’ P&L to gauge
how well other companies are doing in their space and whether or not they should enter new
markets and try to compete with other companies.

In both income statement formats, revenues are always presented before expenses. Expenses can
be listed alphabetically or by total dollar amount. Either presentation is acceptable. P&L expenses
can also be formatted by the nature and the function of the expense.
 Balance sheet. The balance sheet, also called the statement of financial position, is the
third general purpose financial statement prepared during the accounting cycle. It reports a
company’s assets, liabilities, and equity at a single moment in time. The balance sheet is essentially
a picture a company’s recourses, debts, and ownership on a given day. This is why the balance
sheet is sometimes considered less reliable or less telling of a company’s current financial
performance than a profit and loss statement. Annual income statements look at performance over
the course of 12 months, whereas, the statement of financial position only focuses on the financial
position of one day. The balance sheet is basically a report version of the accounting equation also
called the balance sheet equation where assets always equation liabilities plus shareholder’s
equity. In this way, the balance sheet shows how the resources controlled by the business (assets)
are financed by debt (liabilities) or shareholder investments (equity). Investors and creditors
generally look at the statement of financial position for insight as to how efficiently a company
can use its resources and how effectively it can finance them.

This statement can be reported in two different formats: account form and report form. The account
form consists of two columns displaying assets on the left column of the report and liabilities and
equity on the right column. The debit accounts are displayed on the left and credit accounts are on
the right. In both formats, assets are categorized into current and long-term assets. Current assets
consist of resources that will be used in the current year, while long-term assets are resources
lasting longer than one year. Liabilities are also separated into current and long-term categories.

Asset Section, Similar to the accounting equation, assets are always listed first. The asset section
is organized from current to non-current and broken down into two or three subcategories. This
structure helps investors and creditors see what assets the company is investing in, being sold, and
remain unchanged. It also helps with financial ratio analysis. Ratios like the current ratio are used
to identify how leveraged a company is based on its current resources and current obligations. The
first subcategory lists the current assets in order of their liquidity. Here’s a list of the most common
accounts in the current section:
 Current
 Cash
 Accounts Receivable
  Prepaid Expenses
 Inventory
 Due from Affiliates
The second subcategory lists the long-term assets. This section is slightly different than the current
section because many long-term assets are depreciated over time. Thus, the assets are typically
listed with a total accumulated depreciation amount subtracted from them. Here’s a list of the most
common long-term accounts in this section:

 Long-term
 Equipment
 Leasehold Improvements
 Buildings
 Vehicles
 Long-term Notes Receivable
Many times there will be a third subcategory for investments, intangible assets, and or property
that doesn’t fit into the first two. Here are some examples of these balance sheet items:

 Other
 Investments
 Goodwill
 Trademarks
Liabilities Section, Liabilities are also reported in multiple subcategories. There are typically two
or three different liability subcategories in the liabilities section: current, long-term, and owner
debt. The current liabilities section is always reported first and includes debt and other obligations
that will become due in the current period. This usually includes trade debt and short-term loans,
but it can also include the portion of long-term loans that are due in the current period. The current
debts are always listed by due dates starting with accounts payable. Here’s a list of the most
common current liabilities in order of how they appear:
 Current Liabilities
 Accounts Payable
 Accrued Expenses
  Unearned Revenue
 Lines of Credit
 Current Portion of Long-term Debt
The second liabilities section lists the obligations that will become due in more than one year.
Often times all of the long-term debt is simply grouped into one general listing, but it can be listed
in detail. Here are some examples:

 Long-term Liabilities
 Mortgage Payable
 Notes Payable
 Loans Payable
A lot of times owners loan money to their companies instead of taking out a traditional bank loan.
Investors and creditors want to see this type of debt differentiated from traditional debt that’s owed
to third parties, so a third section is often added for owner’s debt. This simply lists the amount due
to shareholders or officers of the company.

Statement of cash flows. the cash flow statement, is the fourth general-purpose financial
statement and summarizes how changes in balance sheet accounts affect the cash account during
the accounting period. It also reconciles beginning and ending cash and cash equivalents account
balances. This statement shows investors and creditors what transactions affected the cash
accounts and how effectively and efficiently a company can use its cash to finance its operations
and expansions. This is particularly important because investors want to know the company is
financially sound while creditors want to know the company is liquid enough to pay its bills as
they come due. The term cash flow generally refers to a company’s ability to collect and maintain
adequate amounts of cash to pay its upcoming bills. In other words, a company with good cash
flow can collect enough cash to pay for its operations and fund its debt service without making
late payments.
The cash flow statement format is divided into three main sections: cash flows from operating
activities, investing activities, and financing activities.
The statement of cash flows is generally prepared using two different methods: the direct
method and the indirect method. Both result in the same financial statement showing how financial
transactions affected would have affected the bank account of the company. Each method is used
for a slightly different reason and typically used for different sized companies. Let’s take a look at
how to create a statement using both the direct and the indirect methods in the next articles.

The following are the importance of financial statements;

Useful to determine the ability of a business to generate cash, and the sources and
uses of that cash. Lenders use financial statements when making business loan decisions or when
they are evaluating an outstanding loan. Accountants use them to assist with tax preparation and
other financial guidance. Just as important, regular financial statements allow the owners and
managers to understand the financial health and make decisions to improve the business. The profit
and loss statement should be created on a regular basis, such as monthly or quarterly. It shows
profit or loss from business operations over a period of time by taking revenue and subtracting
expenses related to operations. This statement helps spot trends in sales and expenses as well as
trends in gross margin and net profit margin. It is a good idea to express expenses and profit
margins as a percentage of sales, as this will make it easier to compare percentages across months,
quarters and years.

To determine whether a business has the capability to pay back its debts, The balance
sheet is a snapshot of financial health and shows the business assets, liabilities and net worth at a
particular point in time. It is also important to produce a balance sheet on a regular basis in order
to spot trends much like the profit and loss statement. The comparison can be made between
months and years by also expressing assets and liabilities as a percentage of total assets. Having
monthly profit and loss and balance sheet statements will allow you to calculate some key ratios,
which are relationships between two numbers. By using the p & l, profitability ratios can be
calculated. They include the gross margin ratio, which is the relationship between sales and gross
profit, and net profit margin, which is the relationship between sales and net profit. In addition,
liquidity ratios can be calculated by using the balance sheet.
 It important on to track financial results on a trend line to spot any looming
profitability issues. Profits reported in the income statement are accounting income and most
likely contain certain non-cash elements, providing no direct information on a company’s cash
exchange during the period. Moreover, a company also incurs cash inflows and outflows during a
period from other non-operating activities, namely investing and financing. To investors, cash
from all sources, not just accounting income from operations, is what pays back their investments.
The importance of the cash flow statement is that it shows the exchange of cash between a
company and the outside world during a period, and so investors can know if the company has
enough cash to pay for expenses and asset purchases.

To investigate the details of certain business transactions, as outlined in the

disclosures that accompany the statements. If a business plans to issue financial statements
to outside users (such as investors or lenders), the financial statements should be formatted in
accordance with one of the major accounting frameworks. These frameworks allow for some
leeway in how financial statements can be structured, so statements issued by different firms
even in the same industry are likely to have somewhat different appearances. Financial
statements that are being issued to outside parties may be audited to verify their accuracy and
fairness of presentation.

To derive financial ratios from the statements that can indicate the condition of the
business. Statement is useful to show the nature of cash receipts and disbursements, by a
variety of categories. This information is of considerable use, since cash flows do not always
match the revenues and expenses shown in the income statement.

As well as the following are the following are the limitations of financial statements;

Incomplete Information, Generally, the financial statements are prepared for an

accounting period. Hence, there is a possibility of disclosing incomplete information. The correct
financial position and exact financial strength of the company can be known when the business is
closed down.
No Brief Information, Accounting rules, methods and conventions are applied for
preparing financial statements. Sometimes experiences of the accountancy profession is also used
for preparation. These lead to detailed information included in the financial statements.
 Qualitative Information is Ignored, only quantitative information is included in the
financial statements and are expressed in monetary terms. But, the qualitative information such as
efficiency of management executives, goodwill of the company, employee and employer
relationship, efficiency of workers, customer satisfaction, loyalty of customers, competitive
strength and the like are not expressed in monetary terms. Hence, these are not included in the
financial statements. However, this qualitative information is necessary for understanding the real
financial position and the operating results of the business.
Disclose Wrong Financial Position, the financial position of a business concern is
affected by several factors such as economic, social and financial. But, the financial statements
include only financial factors. Both social and economic factors are not recorded in the financial
statements. This type of practice leads to disclosing wrong financial position of the company.
Shows only Historical Information, the financial statements are prepared taking into
account of recorded historical costing information. They do not consider present value of money
and cost of living index in the price level changes. Hence, historical information has little scope
for decision making.
Static Financial Position of the Company, A balance sheet is prepared on a specified
date and reflects the financial position on such date. The real financial position of the company
may be changing day to day. Hence, there is a possibility of window dressing in the Balance Sheet.
Financial Statements Are Dumb, the financial statements cannot speak themselves.
They need detailed analysis and interpretation.
Balance Sheet is not a Valuation Statement, Various assets and liabilities are recorded
in the balance sheet at their book value. But, the real value is different from the book value. Hence,
it is clear that real financial position of the company cannot be judged from the balance sheet.
Real Profit is not disclosed by Profit and Loss Account, both operating expenses and
non-operating expenses are recorded in the Profit and Loss Account. They are recorded only on
estimation but not on the basis of actual incurred expenses. Hence, there is a possibility of not
showing real profit by the Profit and Loss Account.
No Comparison of Financial Statements, the financial statements are prepared by
different companies in different accounting methods. The reason is that there are different
accounting policy and size of business concern differs from one company to another. Hence, the
financial statements of two companies cannot be compared.
 The following are tools of financial statements;
Comparative Statements, Comparative statements deal with the comparison of different
items of the Profit and Loss Account and Balance Sheets of two or more periods. Separate
comparative statements are prepared for Profit and Loss Account as Comparative Income
Statement and for Balance Sheets. As a rule, any financial statement can be presented in the form
of comparative statement such as comparative balance sheet, comparative profit and loss account,
comparative cost of production statement, comparative statement of working capital and the like.
Comparative Income Statement, three important information are obtained from the
Comparative Income Statement. They are Gross Profit, Operating Profit and Net Profit. The
changes or the improvement in the profitability of the business concern is find out over a period
of time. If the changes or improvement is not satisfactory, the management can find out the reasons
for it and some corrective action can be taken.
Comparative Balance Sheet, the financial condition of the business concern can be find
out by preparing comparative balance sheet. The various items of Balance sheet for two different
periods are used. The assets are classified as current assets and fixed assets for comparison.
Likewise, the liabilities are classified as current liabilities, long term liabilities and shareholders’
net worth. The term shareholders’ net worth includes Equity Share Capital, Preference Share
Capital, Reserves and Surplus and the like.
Common Size Statements A vertical presentation of financial information is followed for
preparing common-size statements. Besides, the rupee value of financial statement contents is not
taken into consideration. But, only percentage is considered for preparing common size statement.
The total assets or total liabilities or sales is taken as 100 and the balance items are compared to
the total assets, total liabilities or sales in terms of percentage. Thus, a common size statement
shows the relation of each component to the whole. Separate common size statement is prepared
for profit and loss account as Common Size Income Statement and for balance sheet as Common
Size Balance Sheet.
Trend Analysis, the ratios of different items for various periods are find out and then
compared under this analysis. The analysis of the ratios over a period of years gives an idea of
whether the business concern is trending upward or downward. This analysis is otherwise called
as Pyramid Method.
 Average Analysis, Whenever, the trend ratios are calculated for a business concern, such
ratios are compared with industry average. These both trends can be presented on the graph paper
also in the shape of curves. This presentation of facts in the shape of pictures makes the analysis
and comparison more comprehensive and impressive.
Fund Flow Analysis, Fund flow analysis deals with detailed sources and application of funds
of the business concern for a specific period. It indicates where funds come from and how they are
used during the period under review. It highlights the changes in the financial structure of the
company.
Cash Flow Analysis, Cash flow analysis is based on the movement of cash and bank
balances. In other words, the movement of cash instead of movement of working capital would be
considered in the cash flow analysis. There are two types of cash flows. They are actual cash flows
and notional cash flows.
Ratio Analysis, Ratio analysis is an attempt of developing meaningful relationship between
individual items (or group of items) in the balance sheet or profit and loss account. Ratio analysis
is not only useful to internal parties of business concern but also useful to external parties. Ratio
analysis highlights the liquidity, solvency, profitability and capital gearing.
Cost Volume Profit Analysis, this analysis discloses the prevailing relationship among sales,
cost and profit. The cost is divided into two. They are fixed cost and variable cost. There is a
constant relationship between sales and variable cost. Cost analysis enables the management for
better profit planning.
In conclusion, both financial statements are generalized to review and described cash flow
of the films and to ensure the maintenance of getting loss and profit within films . Unlike the asset
and liability sections, the equity section changes depending on the type of entity. For example,
corporations list the common stock, preferred stock, retained earnings, and treasury stock.
Partnerships list the members’ capital and sole proprietorships list the owner’s capital. Like all
financial statements, the balance sheet has a heading that display’s the company name, title of the
statement and the time period of the report.
REFFERENCES;

1. Baumol, William J. 1952, The Transactions Demand for Cash: An Inventory Theoretic
Approach, Quarterly Journal of Economics, v66(4), 545-556
2. Fabozzi, F.J. 1996, Bond Markets, Analysis and Strategies, Prentice Hall, New Jersey
3. Barclay, M.J., and C.W. Smith, On Financial Architecture: Leverage, Maturity and
Priority, Journal of Applied Corporate Finance,
4. https://accountlearning.com/tools-techniques-financial-statement-analysis/
5. https://www.business.org/finance/cost-management/best-tools-for-creating-a-
financial-statement/
6. https://www.myaccountingcourse.com/financial-statements/cash-flow-statement