Financial Statements: Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and

decisions by users of the information. it involves recording, classifying and summarizing various business transactions. The end products of business transactions are the financial statements comprising primarily the position statement or the balance sheet and the income statement or the profit and loss account These statements are the outcome of summarizing process of accounting and are therefore the sources of information on the basis of which conclusions are drawn about the profitability and the financial position of a concern. Financial statements are the basis for decision making by the management as well as all other outsiders who are interested in the affairs of the firm such as a) investors b) creditors c) customers d) suppliers e) financial institutions f) employees g) potential investors h) government and i) general public

The analysis and interpretation of financial statements depend upon the nature and the type of information available in these statements.

Definition of Financial Statements: According to John .N. Myer, the financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on certain date and the income statement showing the results of operations during a certain period. According to Anthony, financial statements, especially, are interim reports, presented annually and reflect a division of the life of an enterprise into more or less arbitrary accounting period-more frequently a year. Nature of financial statements the financial statements are composed of data which are the result of a combinations of 1) recorded facts concerning the business transactions 2) conventions adopted to facilitate the accounting technique 3) postulates, or assumptions made to and 4) Personal judgments used in the application of the postulates. By John .N. Myer

The following points explain the nature of financial statements:

1) recorded facts:

the recorded facts refers to the data taken out from the accounting records the records are maintained on the basis of actual cost data The original or historical cost is the basis of recording various transactions. the figures of various accounts such as cash in hand, cash in bank, bills receivables, sundry debtors, fixed cost etc ., are taken as per the figures recorded in the accounting books. The assets purchased at different times and at different prices are put together and shown at cost prices. As recorded facts are not based on replacement costs, the financial statements do not show current financial condition of the concern.

2) accounting conventions:

certain accounting conventions are followed while repairing financial statements the conventions of valuing inventory at cost or market price, whichever is lower, is followed the valuing of assets at cost less depreciation principle for the balance sheet purposes is followed

 the convention of materiality is followed in dealing with small items like pencils, pens, postage stamps etc. these items are treated as expenditure in the year in which they are purchased even though they are assets in nature. the stationery is valued at cost and not on the principle of cost or market price whichever is less the use of accounting conventions makes financial statements comparable, simple and realistic

3) postulates:

The accountant makes certain assumptions while making accounting while making accounting records. One of these assumptions is that the enterprise is treated as a going concern. The other alternative to this postulate is that the concern is to be liquidated, this, he is untenable if management shows an intention to liquidate the concern. so the assets are shown on the going concern basis.

4) personal judgments:

Even though certain standard accounting conventions are followed in preparing financial statements but still personal judgment of the accountant plays an important part. for example, in applying the cost or market value whichever is lesser to inventory valuation the accountant will have to use his judgment in computing the cost in a particular case. the selection of depreciation method, to use one of the several methods for

estimating uncollectable debts, and to determine the period for writing off intangible assets are some of the examples where judgment of the

accountant will play an important role in choosing the most appropriate course of action. objectives of financial statements: Financial statements are the sources of information on the basis of which conclusions are drawn about the profitability and financial position of a concern. They are the major means employed by firms to present their financial situation of owners, creditors and the general public. The primary objective of financial statements is to assist in decision making. The accounting principles board of America (APB) states the following objectives of financial statements: I. to provide reliable financial information about economic resources and obligations of a business firm II. to provide other needed information about changes in such economic resources and obligations III. to provide reliable information about changes in net resources(resources less obligations) arising out of the business activities IV. to provide financial information that assists in estimating the earning potentials of business V. To disclose, to the extent possible, other information related to the financial statements that is relevant to the needs of the users of these statements.

TYPES OF FINANCIAL STATEMENTS: Financial statements primarily comprise two basic statements: the position statement or the balance sheet the income statement or the profit and loss account However, generally accepted accounting principles (GAAP) specify that a complete set of financial statements must include: A balance sheet An income statement A statement of changes in owners accounts A statement of changes in financial position

FINANCIAL STATEMENTS

POSITION STATEMENT OR BALANCE SHEET

FFFINANCIALSSs INCOME STATEMENT OF SSTATEMENTS STATEMENT OR CHANGES IN OWNERS PROFIT AND LOSS EQUITY OR RETAINED ACCOUNT EARNINNS

STATEMENT OF CHANGES IN FINANCIAL POSITION

FUND FLOW STATEMENT

CASH FLOW STATEMENT

1) Balance sheet (or position statement):

The American institute of certified public accountants defines balance sheet as a tabular statement of summary of balances (debits and credits) carried forward after an actual and constructive closing of books of account and kept according to the principles of accounting. The purpose of the balance sheet is to show the resources that the company has, i.e., its assets, and from where those resources come from, i.e., its liabilities and investments by owners and outsiders. In other words the balance sheet shows the financial position of the company at the end of a given period usually at the end of one year period.

2) income statement (or profit and loss account):

Income statement is prepared to determine the operational position of the concern. It is a statement of revenues earned and the expenses incurred for earning that revenue. If there is excess of revenues over expenditures it will show a profit and if the expenditures are more than the income then there will a loss. The income statement may be prepared in the form of a manufacturing account to find out the cost of production, in the form of trading account to determine gross profit or gross loss, in the form of a profit and loss account to determine net profit or net loss.

3)

statements of changes in owners equity (or retained earnings):

The term owners equity refers to the claims of the owners of the business (shareholders) against the assets of the firm. It consists of two elements; I. paid-up share capital: the initial amount of funds invested by the shareholders II. retained earnings/reserves and surplus: represents the undistributed profits Statement of retained earnings is also known as profit and loss appropriation account and is generally a part of the profit and loss account. This statement shows how the profit of the business for the accounting period have been utilized or appropriated towards reserves and dividend and how much of the same is carried forward to the next period .The balance shown by profit and loss account is transferred to the balance sheet through this statement after making necessary appropriations.

4) statement of changes in financial position:

The statement of changes in financial position has to be prepared to show the changes in assets and liabilities from the end of one period to the end of another point of time. The objective of this statement is to show the movement of funds (working capital or cash) during a particular period.

This statement may take any of the following forms; I. Fund flow statement:

The fund flow statement is designed to analyze the changes in the financial condition of a business enterprise between two periods. The word fund is used to denote working capital This statement will show the sources from which the funds are received and the uses to which these have been put. This statement enables the management to have an idea about the sources of funds and their uses for various purposes This statement helps the management in policy formulation and performance appraisal. II. cash flow statement:

A statement of changes in the financial position of the firm on cash basis is called cash flow statement It summarizes the causes of changes in cash position of the business enterprise between dates of two balance sheets This statement is very much similar to the statement of changes in working capital that is fund flow statement A cash flow statement focuses attention on cash changes only It describes the source of cash and its uses