FINANCIAL STATEMENTS OF A COMPANY

A company's financial statements are the reports that show the financial position of
the company. There are four reports that fall into the category of financial
statements. The statements include the following reports.

 The statement of Profit and loss

 The balance sheet
 The statement of cash flows.

The Income Statement

The income statement is the report that measures the success of company
operations during a given time period. Its purpose is to allow potential financers and
investors to determine profitability, investment value and creditworthiness. This same
group of individuals can use an income statement to evaluate the past performance
of a company and compare it to competitors. They can also use the income
statement to predict future performance and cash flows.

There are four key components of an income statement. They are: revenue, expenses,
gains, and losses. Revenue is the cash inflow of the company. It is the money that is
generated from the company's normal business operations. Expenses are the cash
outflow of the company. They are the costs that are associated with earning revenue.
Gains or losses occur when a company sells a company asset. If the sale produces
more revenue than the asset is worth, a gain occurs. If the sale produces less revenue
that the asset is worth, a loss occurs. The total amount of net income, or profit, is
figured by the following formula:

Net Income = (Total Revenues - Total Expenses) +/- Gains or Losses

The Balance Sheet

The balance sheet is the financial statement that reports the company's assets,
liabilities, and stockholder's equity, sometimes also called owner's equity. This
financial statement is reflective of the basic accounting equation that states:

Assets = Liabilities + Stockholders Equity

A balance sheet comprises of following contents:

1. Share capital

Balance sheets must state disclosures relating to share capital in notes to accounts.
Further, they must contain the following modifications and additions:
  All rights, preference and restrictions associated with each class of share have
to be specified.
 Specific disclosures pertaining to the identity of certain shareholders.
 Details regarding the number of shares issued, subscribed, paid, reserved and
bought back.

2. Reserve and surplus

The balance sheet must classify reserves and surplus funds in the following manner:

 Capital reserve
 Capital redemption reserve
 Debenture redemption reserve
 Securities premium reserve
 Surplus funds

3. Current & non-current assets

Every balance sheet has to classify assets in categories of current and non-current. A
current item has typical features like these: it is used for less than 12 months, it is
mainly held for trading, etc. This distinction is important because it helps make the
details of assets more comprehensive.

4. Borrowings

Similar to assets, borrowings and liabilities can also be current or non-current. Loans
are debts that have a repayment period of more than 12 months are non-current
borrowings. For example, large bank loans are generally non-current in nature. On
the contrary, those with shorter repayment periods are current liabilities.

5. Investments

Even investments come under categories of current and non-current. Investments

which can be realised within 12 months are current investments, while others are
non-current. Every balance sheet must reflect the business’s investments in this
format.

Apart from these basic contents, a typical balance sheet also contains some other
information. This includes trade receivables, trade payables, cash and cash
equivalent, inventories, etc.

Statement of Profit and Loss

Apart from the balance sheet, a statement of profit and loss is the second important
financial statement. It basically shows revenues and expenses of a business.
Deduction of taxes from this depicts the final profit or loss amount. The format of a
profit and loss statement is also given in Schedule VI (Part II) of Companies Act, 1956.

Contents of a Statement of Profit and Loss:

 Revenue from operations, including sales and other operating revenue.

Furthermore, finance companies have to state revenue from interest, dividend
and other services.
 Other income, including income from interest, dividend, non-operating
income and income from the sale of investments.
 Expenses, including costs of materials, stock-in-trade, finance costs,
depreciation, employees benefits and all other expenses.

Objectives of Financial Statements

Stakeholders of a company heavily rely on financial statements to understand its
functioning. They portray the true state of affairs of the company. Here are some
objectives of financial statements:

 These statements show an accurate state of a company’s economic assets and

liabilities. External stakeholders like investors and authorities generally do not
possess this information otherwise.
 They help in predicting the extent of a company’s capacity to earn profits.
Shareholders and investors can use this data to make their financial decisions.
 These statements depict the effectiveness of a company’s management. How
well a company is performing depends on its profitability, which these
statements show.
 They even help readers of these statements know the accounting policies used
in them. This helps in understanding statements more comprehensively.
 These statements also provide information relating to the company’s cash
flows. Investors and creditors can use this data to predict the company’s
liquidity and cash requirements.
 Finally, they explain the social impact of businesses. This is because it shows
how the company’s external factors affect its functioning.