Financial Statement/Information

A financial statement is a formal and structured report that summarizes the financial transactions,
activities, and performance of a business or organization over a specific period of time. Financial
statements are prepared and presented to provide a clear and comprehensive overview of an
entity's financial health, position, and results of operations. They are a key component of
financial reporting and are used by various stakeholders to assess the entity's financial
performance and make informed decisions.
Qualitative Characteristics of Useful Financial Information
The International Accounting Standards Board’s conceptual framework states that accounting
information is useful if it possesses both the fundamental and enhancing qualitative
characteristics.
Fundamental Qualitative Characteristics
The fundamental Qualitative Characteristics are relevance and faithful representation
a. Relevance: Financial information is relevant if it can make a difference in the decision
made by users. Information in financial statements should be relevant to the decision-
making needs of users. A financial information makes difference in users’ decision when
the users are aware of such information and take full advantage of it or not. A reliable
financial information is capable of making difference in decisions when it has: Predictive
value and Confirmative value or both. Information has predictive value if it helps the
users to predict what happen in the future. Where the information helps users confirm
their earlier assessments and predictions made in the past, it is said to possess
confirmatory value.
b. Faithful Representation Financial reports a depiction of economic phenomena in words
and numbers. To be useful, financial information must not only represent relevant
phenomena, but it must also faithfully represent the phenomena that it purports to
represent. To be a perfectly faithful representation, a decision would have three
characteristics. This means that financial statements should not only be accurate but
also reflect the economic reality of the business. It will be complete, neutral and free
from error. A complete depiction includes all information necessary for a user to
understand the phenomenon being depicted. A neutral depiction is without bias in the
selection or presentation of financial information. Free from error means there are no
errors or omissions in the description of the phenomenon, and the process used to
produce the reported information has been selected and applied with no errors in the
process.
Enhancing Qualitative Characteristics
These are qualitative characteristics that enhance the usefulness of information that is relevant
and faithfully presented. They include:
i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability
a. Comparability: Financial statements should allow for meaningful comparisons over time
and with other entities. Consistency in accounting policies and presentation formats is
essential to enhance comparability. Comparability is that qualitative characteristic of
financial information that allows a choice between alternatives. Where an entity is
privileged to have information about the financial performance of other entities of similar
sizes in the same industry, a comparison of the entity’s performance with those of others
enables sound economic decisions to be made. For example, decisions as to whether to
dispose or hold a particular investment, whether to invest in one industry in preference to
another are made by this process.
b. Verifiability: Verifiability is the quality that enables users to have the assurance that the
information depicts exactly what it purports to state. As such different knowledgeable
people considering the information will be able to arrive at similar decisions on the same
issue.
c. Timeliness: Timeliness implies that users are given the relevant information needed to
take economic decisions in time. Generally, the longer the information had been obtained
the less useful it becomes for making today’s decisions. However, where a user is
required to make some trend analysis, seemingly old information may have some
continuing usefulness
d. Understandability: Financial statements should be presented in a clear and concise
manner, using plain language and without unnecessary complexity. Information should
be presented in a way that the user can comprehend it. This can be achieved if the
information is appropriately classified so that the user easily grasps the information.
Financial reports should therefore be presented in a form that any average knowledgeable
reader can understand for it to be useful to him.
The Elements of Financial Statements
The IASB’s conceptual framework identified five elements of Financial Statements. Three of
these that relate to the statement of financial position are as follows:
 assets;
 Liabilities; and
 Equity
The remaining two relate to the statement of profit or loss and they are:
 Income; and
 Expenses
Assets: An asset is defined by the IASB’s “Framework” as:
 A resource controlled by an entity;
 As a result of past events; and
  From which future economic benefits are expected to flow to the entity For an asset
to be recognised in the statement of financial position, the asset must possess the
above three characteristics.
Non-current Assets: Non-current assets, also known as long-term assets or fixed assets, are
items of value that a company owns and expects to use for more than one accounting period
(usually over one year) to generate income or provide benefits. These assets are essential for
a company's operations and are not intended for immediate sale or conversion into cash.
Non-current assets are reported on a company's balance sheet and can include various
categories, such as land and buildings, motor vehicles, equipment, machinery, furniture etc.
Current Assets: These are the economic resources of the business which are easily
converted to cash or can be consumed within an accounting period or operation cycle,
whichever is longer. Examples are cash in hand and at bank, receivables and other
receivables, prepaid expenses and inventories of goods meant for resale.

Liabilities: A liability is defined by the IASB as:

 A present obligation of an entity
 Arising from past events
 The settlement of which is expected to result in an outflow of resources that embody
economic benefits
Non-current liabilities: These are current obligations that will take more than one year
before repayment is due. They are long-term loans.
Current Liabilities: These are the amounts owed currently by business that are meant to be
paid within twelve months. Examples of current liabilities are trade payables (supplier of
goods on credit), and other payables such as outstanding bills on electricity, salary and
wages, taxation etc. and bank overdraft.
Equity: Equity is the residual interest in an entity after the value of all its liabilities have
been deducted from the value of all its assets. Examples are ordinary shares, preferred shares,
share premium and retained earnings.
Income: Income includes both revenue and gains.
 Revenue is income arising in the course of the ordinary activities of an entity.
Examples are sales revenue, fee income, royalties’ income, and rental income
 Include gains on the disposal of non-current assets.
Expenses: Expenses are expenses and losses
 Expenses arising in the normal course of activities. Examples are cost of sales and other
operating costs.
 Losses include loss on the disposal of non-current assets or diminution in value of assets.
Accounting equation
This signifies the relationships existing between the elements of the basic financial statements
(statement of financial position and statement of profit or loss)
Basic Accounting Equation
The basic accounting equation expresses the equality of Assets to Equity. In practice, the owner
of a business outfit starts by bringing in equity and this is recorded by the business as incoming
asset that is equivalent to the equity supplied. Mathematically, this is expressed as:
Asset = Equity
Symbolically, this can be stated as:
A=E
Where A is asset
E is equity
Example 1
Owonikoko, started his business by paying N250,000 into the Business Bank Account.
Solution
Payment by Owonikoko is equity (E)
Money received into the Business Account is asset (A)
Therefore A = E
Substituting values for the equation above
N250,000 = N250,000

Example 2
If Owonikoko decides to buy inventory of N50,000 on credit, the structure of the equation will
change. We now have a liability, the giver of the inventory and also an asset, the inventory
received. The equation has now expanded to include, Assets, Liability and equity. Symbolically,
Liability is represented by L. The new accounting equation will now be:
A=L+E
Cash at Bank N250,000
Inventory N50,000 (owing to suppliers) 50,000
300,000 = N50,000+N250,000
Assets and Liabilities have both increased.
The expanded equation is now
A=L+E
Changing the subject to the formula
The subject of the formula can be changed to derive any of the two other items as follows: To
make L the subject of the formula
A=L+E
A-E=L
This can be rearranged to read:
L=A-E
If on the other hand E is to be made the subject of the formula, the formula will be derived as
follows:
A=L+E
A-L=L