CONTENT

Financial Statements:
Definition: Financial statement is a written record of the position and financial activity of a
business. A general-purpose set of financial statements usually includes a Balance sheet,
income statements, statement of owner’s equity, and statement of cash flows.

Input Processing Output

Transactions and Accounting principles Financial statements

Events of a firm and procedures -income statement
-Balance Sheet
-Standard of retained earning
-Statement of changes in Financial Position

Features of Financial statements:

Some main features of financial statement are as follows:

 Financial statement is related to the events of past period so they are known as historical
records.
 The financial statement involves transaction only related to monetary terms i.e. financial
in nature.
 The financial statements record the only actual monetary transactions.
 Financial statement discloses the operating result of a business through income statement
and financial position through balance sheet.

Purpose/Objectives of Financial Statements:

The purpose/objectives of financial statements are as follows:

 It helps to disclose financial performance or efficiency of a business through income
statement.
 It helps to disclose financial position of a business through balance sheet.
 It helps to provide financial useful information for decision making.
 It helps to provide financial useful information about economic resources and obligations
of the business organization.
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Importance or Advantages of Financial Statement:

Importance or Advantages of Financial Statement are as follows:

 Judging the operational efficiency of the business: The analysis of financial statements
match the amount of manufacturing, selling and distribution and financial expenses of the
current year.
 Measuring short and long- term financial position: Current and liquid ratios can be
detected by comparing current assets and current liabilities to ascertain short-term
financial soundness.
 Forecasting budgeting and deciding future line of action: Analysis of financial
statement predicts the growth potential of the business. Comparison of actual
performance with the desired performance is shown our short comings.

Limitation of Financial Statements:

The following limitation of financial statements are given below:

 In order to do any with these limitation of financial statement analysis of financial
statements become necessary financial statements suffer with the following weakness.
 It ignores qualitative aspects of the business organization.
 Financial statements are prepared and based upon traditions and convention.
 It ignores human resource accounting.
 It ignores price level changes.

Types of Financial Statements:

There are four types of financial statement are given below:

Types/Components of Financial statement

Income statement of Balance Statement of Cash Flow

Statement Retained Earning sheet change in owner Statement
Shareholder equity

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1.Income Statement or profit and loss account: This statements is prepared to find out the
operating result of the organization for an accounting period To find out the operating
result ,revenue is adjusted operating expenses, when revenue become more than expenses, profit
is obtained or vice versa.
Types of Income statement
a. Single-step Income Statement: under this income statement, all expenses and loses are
added together and they deducted in a single-step form all revenue and gains to arrive at
net income.
b. Multi-Step Income Statement: The purpose of the multiple step income statement is to
subdivide the income statement into specific sections and provide the reader with
important subtotals.
2. Statement of Retained Earnings: Profit of the company has been categorized into two parts.
Dividend is the first part which is distributed to the shareholders and second type of profit is
transferred to the different types of reserve and surplus. The statement that shows the status of
the company by distributing the profits in different contents is known as Statement of Retained
Earning.
3. Balance Sheet: The statement shows the overall financial position of the organization for
fiscal year. The financial position involves the amount of assets, liabilities and shareholder’s
equity. The format given in company act for balance sheet does not consider T-shape or
horizontal format as it is usually practiced in class room for students.
4. Statement of change in owner/ Shareholder Equity: The statement of changes in equity is a
reconciliation of the beginning and ending balances in a company’s equity during a reporting
period. It is not considered an essential part of the monthly financial statements, and so is the
most likely of all the financial statements not to be issued. However, it is a common part of the
annual financial statements.
5. Cash Flow Statement: A cash flow statement is a financial statement that provides
aggregate data regarding all cash inflows that a company receives from its ongoing operations
and external investment sources. It also includes all cash outflows that pay for business
activities and investments during a given period.  
Illustration-9
The following is the Trial balance of goodwill public limited as on 31 st December last year

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 Particular Amount Particular Amount
Rent and rates 1,30,000 Sales 4,00,000
Purchase 3,00,000 Accounts payable 70,000
Fixed assets 6,00,000 15% Mortgage loan 1,80,000
Wages 36,000 Equity share capital 6,00,000
10% Investment 1,70,00 Share premium 40,000
Preliminary expenses 10,000
Cash at bank 44,000
Total 12,90,000 Total 12,90,000
Adjustment:
Rent payable……Rs.10,000 per month
Closing stock……Rs.60,000
Wages payable……..Rs.4,000 month
Required:
a. Income Statement
b. Balance Sheet
Solution:
a. Income Statement

For the year ended 31 st December, Last year

Particular Amount Amount

Sales revenue 4,00,000
Less: Cost of goods sold: 3,00,000
Purchase 48,000
Wages (36,000 + 12,000) (60,000) 2,88,000
Closing stock 1,12,000
Gross profit
Add: Operating and Non-operating income:
Outstanding interest on investment (10% of Rs.1,70,000) 17,000
Appreciation of fixed assets(12% of Rs. 6,00,000) 72,000 89,000
2,01,000
Less: Operating and Non-operating expenses: Rent(1,30,000-10,000) 1,20,000
Outstanding interest on mortgage loan(15% Mortgage loan) 27,000
Net Profit after Tax 54,000
b. Balance sheet

As on 31 st, December, Last year

Particulars Amount Amount

Source of fund
Owner’s equity/Internal capital: