Financial Statements Financial statements are the formal records of the financial position of a business. Components of financial statements A balance sheet at the end of the period (Position statement) Statement of profit and loss. Statement of changes in equity. Statement of cash flows. Notes comprising a summary of significant accounting policies and other explanatory information Comparative information in respect of the preceding period as specified in paragraphs 38 and 38A. Features of financial statements 1. True and fair presentation and compliance with IND Ass. 2. Going Concern. 3. Presentation consistency. 4. Accrual basis of accounting. 5. Materiality and aggregation. 6. Offsetting. 7. Comparative information. Statement of Financial position (SOFP) The statement of financial position also known as balance sheet represents the assets, liabilities and equity of a business at a point in time. Statement of profit/loss (SOPL) A statement of profit and loss is an income statement of a company. It shows the company’s revenue and expenses during a particular period. Statement of Changes in equity A statement of changes in equity is a financial statement that measures the changes in owner’s equity for a specified accounting period. Reserve Reserve is the retention of the profit which is not for any known liability. Capital Reserve The reserve created out from the profit of capital nature is known as capital reserves. Revenue Reserve The reserves created by the retention of a share of net profits for the year are known as revenue reserve. Provision It is the amount which is charged against profit or loss account for some uncertain amount of known liability. Difference between reserve and provision Reserve Provision It is an appropriation of profit It is a charge against profit It is made for unknown liabilities It is made for known liabilities It is created only for profit Creation of provision compulsory It can be used to distribute as It cannot be used to distribute as dividend dividend It is created by debiting profit and It is created by debiting profit and loss appropriation account loss account. Contingent Asset These are those assets which arise from the occurrence or non- occurrence of one or more uncertain future events. Contingent Liability It is a liability that may occur depending on the outcome of an uncertain future event. Cash It comprises of cash on hand and demand deposits. Cash and cash equivalents 1. Short term (where the original maturity is 3 months or less. 2. Highly liquid investments. 3. Readily convertible to known amounts of cash. Cash flow It simply refers to inflow and outflow of cash in a business. Cash Flow statement Cash flow statement is a financial statement showing changes in balance sheet accounts and income affect cash and cash equivalence. Classification of cash flows 1. Cash flow from operating activities. 2. Cash flow from investing activities. 3. Cash flow from financing activities. 1. Cash flow from operating activities These are cash flows from regular course of operations of a business. Examples: a) Cash sales b) Cash received from debtors c) Cash purchase of goods d) Cash paid to suppliers. e) Wage paid to employees. 2. Cash flow from investing activities Investing activities includes purchase and sale of fixed assets. Examples a) Cash payment to purchase fixed asset. b) Cash receipts from sale of fixed assets. c) Cash payment to purchase shares, debentures etc. d) Cash receipts from sales of shares, debentures etc. 3. Cash flow from financing activities The financing activities of a firm include issuing or redemption of share capital, debentures and raising and repayment of loans. Examples a) Cash proceeds from issue of shares. b) Cash proceeds from issue of debentures. c) Cash proceeds from raising of loans. d) Redemption of shares. e) Redemption of debentures. f) Repayment of loans. Steps for preparation of cash flow statements Compute the net increase or decrease in cash or cash equivalents. Calculate net cash flow from operating activities. Calculate net cash flow from investing activities. Calculate net cash flow from financing activities. Prepare a formal cash flow statement highlighting the net cash flow from operating, investing and financing activities. Make an aggregate net cash flow from these three activities. Report significant non-cash transactions.