University School of Business

DEPARTMENT - MBA
Master of Business Administration
Financial Reporting and Analysis 22BAT- 602
Chapter: 1.1

Faculty Name: Ms. Reepu

(Assistant Professor)
1.1 UNDERSTANDING
DISCOVER . LEARN . EMPOWER
FINANCIAL STATEMENT
 UNDERSTANDING
FINANCIAL
STATEMENT
Course Outcome
CO1 To understand the format and content of the three basic financial statements
CO2 To integrate the information obtained from financial statements for assessing the
financial performance of a business organization
Will be covered in this
lecture
CO3 To examine the financial stability and growth of business organizations using financial
statement analysis techniques

CO4 To assess the quality of financial reports after detecting the manipulations in the
financial statements

CO5 To facilitate decision making on the basis of quality of financial reports

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Understanding Financial Statement:

•Nature and objectives of Financial Statements,

•Uses of Financial Statements,
•Form and content of Financial Statements,
•Users of Financial Statements

Financial statements provide the fundamental information that

we use to analyze and answer valuation questions.

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 Nature of Financial Statement

1. Recorded Facts
2. Accounting Conventions
3. Postulates
4. Personal Judgments
1. Recorded Facts

• Recorded information are used for preparing financial statements.

(Journal, Ledger and Trial Balance)

• After some gradual passage of time, these recorded information

become historical in nature.

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Recorded Facts..

• There is no place for their current value in the financial statements which is
neither justified nor logical.

For example:

• If a plant and machinery is purchased in 2005 and another plant and machinery is
purchased in 2010, then the total amount paid at both dates shall be shown under
“Plant and Machinery Account” in the books.

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Recorded Facts..

• The purchasing power of money in 2005 is not the same in 2010. Hence, the
recording the value of plant and machinery in the books of account is not valid
and correct.

• Besides, the assets are shown in the Balance Sheet either on Straight Line Method
or Written Down Value Method.

• Market value or replacement cost is not shown in the financial statement.

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2. Accounting Conventions
There are four types of accounting conventions.

They are convention of conservatism, convention of full disclosure, convention

of consistency and convention of materiality.

These are used for valuation of raw materials, stock of finished goods, debtors
and the like.

Many companies does not follow same pattern of conventions throughout its life.
Hence, the financial statements fail to satisfy the essential elements of
comparison.

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3. Postulates
There are some postulates and assumptions just like accounting concepts and
conventions.

used for preparing. financial statements.

It is assumed that the purchasing power of money is constant for all the period.

Hence, the management accountants are recording all the business transactions in
rupee value on different dates without making any distinction between the rupee
value of two dates.

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4. Personal Judgment

•The management accountants may use their judgment in choosing the method of
valuation of closing inventory, in calculating the provision for bad debts and in
choosing the method of charging the depreciation of fixed assets.

•Different meaning and results can be obtained from the financial statements of the
same company.

•Based on the different results, different recommendations may be provided for the
growth and development of a business concern.

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Poll Question
Matching Principle, Single Entity and Accrual basis are the examples of

A.Accounting Conventions

B.Accounting Concepts

C.Accounting Users

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Features of Financial Statements

The important features of financial statements are as follows.

1.Financial Statements are prepared at the end of the accounting period.

2. Financial Statements disclose both facts and opinions.

3. Financial statements are prepared on the going concern value..

4. Financial statements are recorded facts of financial transactions based on historical

cost.

5. Financial statements are greatly affected by personal judgment of the accountants.

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 Objectives of Financial Statements:
• The primary objectives of financial statements are to present the true and fair
value of the state of affairs of the firm with the help of its various statements viz.
Income statement,
• Balance sheet,
• Cash flow statement,
• Funds flow statements, i.e. to supply necessary information to the users and
analysts for taking decisions which will be formulated in future.

• In short, the objectives of financial statement is to provide information about the

financial position, financial performance and change in financial position of an
enterprise that is useful to a wide range of users in making economic decisions.

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The significant objectives of financial statements are:

(i)They provides necessary information about the financial activities to the interested
parties.

(ii) About the efficiency or otherwise of the

management, regarding the proper utilization of the scarce resources.

(iii) Information for predictions (financial forecasting).

(iv) They help to evaluate the earning capacity of the firm by supplying a statement
of financial position, a statement of periodical earnings together with a
statement of financial activities to the various interested persons.

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(v) They facilitate decisions regarding the changes in the manner of acquisition,
utilization, preservation and distribution of the scarce resources.

(vi) They facilitate decisions regarding replacement of fixed assets and expansion of
the firm.

(vii) They provide necessary data to the government for taking proper decisions
relating to duties, taxes and price control, etc. and for some legal and control
purposes.

(viii) They device remedial measures for the deviations between the actual and
budgeted performances.

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(ix) They also provide necessary data and information to the managers for internal
reporting and formulation of overall policies.

(x) They also help to safeguard the interest of shareholders who are not allowed to
go through the day-to-day affairs of the firm.

(xi) They help to settle disputes arising from High Court, Supreme Court, and
Arbitrators etc.

(xii) They help the credit rating agencies to determine the rating of the Company.

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Poll Question
Personal Judgment of Accountants is related to the decision making
regarding:-

A Selection of Method of Depreciation

B Selection of Method of Inventory Valuation
C Both of the above
D None of these

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Advantages of Financial Statements

1. Bridging the Gap in Business and Management

2. Report on stewardship function
3. Availing Credit from Lenders
4. Use for Investors
5. Use for Government
6. Use for Stock Exchanges
7. Information on Investments

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Poll Question
Full Disclosure, Consistency, Conservatism and Matching Principle are
the Accounting Conventions

A.True

B.False

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 Blackboard
Assessment Pattern

Components HT-1 HT-2 Assignment Surprise Test Business Quiz GD Forum Attendance Scaled
Marks

Max. Marks 10 10 6 4 4 4 2 40

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 References

•Reference book- Maheshwari S.N, Accounting for Management, Vikas Publishing House, New Delhi,2010
•Reference Website: https://www.accountingtools.com/articles/users-of-financial-statements.html
•Reference Journal for advance study: Journal of Accountancy (JOA)

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THANK YOU

For queries
Email: reepu.usb@cumail.in