Financial Statements A beginners' Guide |
Posted: July 9, 2020 |
Financial Statements Overview:Financial Statements are the financial documents providing significant information about the financial activities of the business entity. The objective of financial statements is to provide information about the financial position, financial performance, status of owner’s equity, and cash flows of an entity. It is useful for the stakeholders of an entity in making economic decisions. The stakeholders of the entity need this information as it could affect their decision making. Those decisions involve buying, selling, or holding of equity and debt instruments, and the issuance or settlement of loans and other credit types. The stakeholders are investors, lenders, suppliers, employees, customers, management of the organization, the general public, and government authorities. All of them are interested in financial performance, financial position, and cash flows. Some users are particularly concerned with performance and profitability, while others may be more interested in liquidity or other financial matters. Financial statements are particularly important for decision making. As we know that they contain a large number of figures. These figures do not necessarily have much meaning to a user of the financial statements, however, we can analyze and interpret these figures using financial statement analysis. There are five types of financial statements based on U GAAP and IAS 1 issued by IASB.
Types of financial statements1) Statement of financial positionThe Statement of financial position is a structured presentation of the assets, liabilities, and equity of the business on a particular date. It is a detailed representation of a fundamental equation which means all the resources (assets) owned by the entity are financed through the sources of either debt or equity. A statement of financial position (formerly called a balance sheet) is also referred to as a statement of net worth.
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2) Income StatementThe income statement is a financial document providing detailed information about revenues, expenses, and profit or loss for a specific period. It helps users of the income statement to assess and measure the financial performance of an entity. We also know it as a statement of profit or loss.
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3) Statement of Cash FlowsA statement of cash flows provides information about where a business obtained its cash, and how that cash was used during the financial period. As per IAS 1, the statement of cash flows is a part of a complete set of the financial statements of an entity. IAS 7 requires entities to report cash flows for the period under three sections:
The statement of cash flows is extremely valuable because it helps in the reconciliation of the beginning and ending cash on the balance sheet.
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4) Statement of changes in equityChanges in equity is the increase or decrease in the net assets of the entity. The statement of changes in equity tells users about the status of the owners’ equity at the beginning of the financial year, how it changed during the year and the status of the equity at the end of the year. It helps users to identify the key factors responsible for changes in owners’ equity over the accounting period. It is helpful for shareholders because it provides great insights into the effects of business operations over their investment in a business.
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5) Notes to the Financial Statements (Disclosure)Notes are additional information together with other financial statements. It requires an entity to disclose all information that matters to financial statements and help users to have a better understanding because this is the mandatory requirement by IFRS. It provides additional information that is not presented on the face of the financial statements but is relevant to an understanding of them. A specific order for the presentation of notes is:
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