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• Financial statements- Balance sheet-Income

Statements, Fund flow statements-Uses of


financial statements; Financial statement
analysis- Inter firm and intra firm analysis.
• Financial Statements is simply a declaration of
what is believed to be true about an enterprise,
communicated in monetary terms. It is a
summarized form of account balances, arranged
in meaningful and logical order. The facts and
concepts they portray can be readily interpreted
and used as bases for decision by the people,
interested in the affairs of the business. These
statements are prepared for the purpose of
presenting periodical review of the progress
made by the firm. Financial statements are also
called financial reports.
• Smith and Asburne define financial
statements as “ the end product of financial
accounting in a set of financial statements
prepared by the accountants of a business
enterprise- that purport to reveal the financial
position of the enterprise, the result of its
recent activities, and an analysis of what has
been done with earnings.
• All types of business enterprises, irrespective
of the form of ownership such as sole
proprietorship, partnership firm, joint stock
companies, cooperative societies; and nature
of business such as trading, manufacturing,
service rendering prepare financial statements
for the desired periodicity.
• In India, Sec 210 of the Companies Act has
made it mandatory that at the annual general
body meeting the Board of Directors of the
company shall present before the members
the audited profit and loss account and
balance sheet.
Nature of financial statements
• Recorded facts
– It refers to the data taken out from the accounting
records. The records are maintained on the basis
of actual cost data. The original cost or historical
cost is the basis of recording various transactions.
• Accounting Conventions
– Certain accounting conventions are followed while
preparing financial statements. The use of
accounting conventions make financial statements
comparable, simple and realistic.
• Postulates
– The accountants make certain assumptions while
making accounting records
• Personal judgments
– Even though certain standard accounting
convections are followed in preparing financial
statements but still personal judgment of the
accountant plays an important part.
Objectives of Financial Statements
• To provide reliable financial information about
economic resources and obligations of a business firm.
• To provide other needed information about changes in
such economic resources and obligations.
• To provide reliable information about changes in net
resources(resources less obligations) arising out of
business activities.
• To provide reliable information that assist in estimating
the earning potentials of business.
• 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 statement;
– Position Statements or the Balance Sheet
– 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.