FINANCIAL STATEMENTS

BY DR.MAHESH KUMAR.K.R.
M.com., MBA (Marketing), MBA., (I &RM).,MHRM., MA (Economics)., MS (Edu.Mgt).,LLB.,PGDFM., PGDBA., M.Phil., Ph.D., MSc.,( Psy).,

financial statements are the outcome of summarizing process of accounting.Meaning: Financial statement is a collection of data organized according to logical and consistent accounting procedures. In other words. .

and analysis of what has been done with earnings”. .Definition Smith and Asburn define financial statements as “the end product of financial accounting in a set of financial statements prepared by the accountant of a business enterprise—that purport to reveal the financial position of the enterprise. the result of its recent activities.

NATURE OF FINANCIAL STATEMENTS • • • • Recorded facts GAAPs Postulates (Assumptions) Personal judgements .

. 4.COMPOSITION OF FINANCIAL REPORTS 1. Financial statements a)Profit and Loss account (Income Statement) b) Balance Sheet   2. Statements of changes in financial position a) Fund flow statement b) Cash flow statement . Reports a)Directors’ report b)Chairman’s speech (Delivered at the Annual General Meeting) c) Auditors’ report 3. Explanatory notes a) Depreciation methods b) Inventory valuation methods c) Details of contingent liabilities etc. 5. Schedules a) Schedule of Fixed assets b) Schedule of Longterm investements c) Schedule of inventories d) Schedule of reserves e) schedule of longterm liabilities etc..

To provide required information to different interested parties in the business entity. 4. comparing and evaluating the earning capacity of the business entity. liabilities and capital of the business entity. . 3.OBJECTIVES OF FINANCIAL STATEMENTS 1. To provide useful information about predicting. To provide adequate information about the financial performance and the assets. To provide needed information about changes in economic resources and obligations. 2.

3. 7. 5. 8. Fulfilment of statutory requirements Historical data Interim reports Emphasis on only quantitative information GAAP Personal judgements Opportunities for Manipulation (Window dressing) Failure to recognize the changes in the price level . 6.LIMITATIONS OF FINANCIAL STATEMENTS 1. 4. 2.

USE AND IMPORTANCE OF FINANCIAL STATEMENTS As a basis for granting credit As guide to advise dividend action As informative for prospective investors To determine the legality of dividends As a guide to the value of investment already made • As basis for price or rate regulation • As a basis for taxation • As an aid to government supervision • • • • • .

PARTIES INTERESTED IN FINANCIAL STATEMENTS • • • • • • • • • • • MANAGEMENT CREDITORS BANKERS INVESTORS GOVERNMENT TRADE ASSOCIATIONS STOCK EXCHANGES RESEARCHERS ECONOMISTS EMPLOYEES GENERAL PUBLIC .

FINANCIAL STATEMENTS ANALYSIS • MEANING: • “the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationship between the items of the Balance sheet and the Profit and loss account” .

MEANING OF FINANCIAL “ANALYSIS” • The simplification of financial data by methodical classification of the data given in the financial statements. .

.MEANING OF FINANCIAL “INTERPRETATION” • Explaining the meaning and significance of the data so simplified.

TYPES OF FINANCIAL ANALYSIS 1) on the basis of material used a)External analysis b) Internal analysis 2) On the basis of modus operandi/operation a) Horizontal analysis b) Vertical analysis .

METHODS OR DEVICES OF FINANCIAL ANALYSIS 1) COMPARATIVE STATEMENTS 2) COMMON-SIZE STATEMENTS 3) TREND ANALYSIS 4) FUNDS FLOW ANALYSIS 5) CASH FLOW ANALYSIS 6) RATIO ANALYSIS 7) COST-VOLUME-PROFIT ANALYSIS .