LESSON 2A FINANCIAL STATEMENTS

The objective of the financial statements is to provide information about the financial position,
performance and cash flows of the enterprise that is useful to a wide range of users in making economic
decisions.

Financial Position – The financial position of an enterprise comprises its assets, liabilities and equity at a
particular time. It pertains to the economic resources, liquidity, solvency, financial structure and capacity
adaptation of an enterprise. It is pictured in the balance sheet.

-Information about the economic resources controlled by the enterprise and its capacity to modify these
resources is useful in predicting the ability of the enterprise to generate cash and cash equivalents in the
future.

-liquidity is the availability of cash in the near future to cover currently maturing obligations.

-Solvency is the availability of cash over a long term to meet financial commitments when they fall due.

-Financial structure is the source if financing for the assets of the enterprise In other words, financial
structure is the ratio of equity capital to liabilities. Information about financial structure is useful in
predicting future borrowing needs and how profits and cash flows will be distributed between creditors
and owners.

Capacity for adaptation is known as financial flexibility.

Financial Performance – The performance of an enterprise comprises its revenue, expenses and net
income or loss for period of time, It is the level of income earned by the enterprise through the efficient
and effective use of its resources. The performance of an enterprise is previously known as results of
operations and is portrayed in the income statement.

Cash Flow – Information about the cash flow is useful in order to assess the operating, investing, and
financing activities of the enterprise during a period. The information is found in the cash flow
statement.

Elements of a financial statement – these are the quantitative information

Asset – economic resources you can control that have resulted from past events and can provide you
with future economic benefits

Liabilities – are your present obligations that have resulted from past events and can require you to give
up resources when settling them.

Equity – Assets minus liabilities

Income – is increases in economic benefits during the period ( revenue or a gain)

Expenses – decreases in economic benefits ( expense or losses)