Financial

Statements
Presented by-
1. Aarti Divya

2. Abhay Singh Chauhan

3. Abhishek Rane

4. Aditi Jain

5. Amit Kumar

6. Ananya Das
"If you don't have regular and accurate
financial statements, you're driving your
business 100 miles an hour down a one-way
street the wrong way, at night, in the fog,
without lights."

- JIM BLASINGAME
 Financial Statements
• Financial statements are written records that convey the business activities and
the financial performance of a company. Financial statements are often audited by
government agencies, accountants, firms, etc. to ensure accuracy and for tax,
financing, or investing purposes.

• They are the end products of the accounting process.

• They reveal the financial health of an entity with regard to the profits earned
during a specific period and the position of assets and liabilities on a specific date.
Nature of Financial Statements
The financial statements are prepared on the basis of recorded facts.
Recorded facts are those which can be expressed in monetary terms. The
statements are prepared for a particular period, generally one year. The
transactions are recorded in chronological order, as and when the events
happen.
According to John N. Myer, “The financial statements are composed of
data which are the result of combinations of:
• Recorded facts concerning the business transactions,
• Conventions adopted to facilitate the accounting technique,
• Postulates, or assumptions made to and
• Personal judgments used in the application of the conventions and
postulates.”
 Recorded Facts
The term ‘recorded facts’ refers to the
fact that items recorded in financial
statement reflects their original cost.
The original cost or historical cost is
the basis of recording various
transactions. The figures of various
accounts such as cash in hand, cash in
bank, bills receivables, sundry debtors,
fixed assets, etc. are taken as per the
figures recorded in the accounting
books.
Accounting Conventions
These are basically past practices that
are generally accepted and adopted in
preparing financial statements. Certain
accounting conventions are followed
while preparing financial statements.
The convention of valuing inventory
at cost or market price, whichever is
lower, is followed. There are 4
conventions consistency, prudence,
materiality and full disclosure .
 Postulates
These are basic accounting principles
which ensure that financial information
presented provides true and fair view of
financial performance. One of these
assumptions is that the enterprise is
treated as a going concern. The other
alternative to this postulate is that the
concern is to be liquidated, this, is
untenable if management shows an
intention to liquidate the concern. So
the assets are shown on a going
concern basis.
Personal Judgments
Even though certain standard accounting
conventions are followed in preparing
financial statements but still personal
judgment of the accountant plays an
important part.
For example, in applying the cost or market
value whichever is less to inventory valuation
the accountant will have to use his judgment
in computing the cost in a particular case.
There are a number of methods for valuing
stock, viz.; last in first out, first in first out,
average cost method, standard cost, base
stock method, etc.
 Importance of Financial Statement
1. Knowing profitability of business- financial statements lets us know whether organisation is earning profit or
incurring loss.

2. Knowing the solvency of business- helps in analysing position of business with respect to the capacity of entity
to repay its short term and long term liabilities.

3. Judging the growth of the business- By comparing data of 2 or more years of organisation we can draw
meaningful conclusion with respect to growth of business.

4. Judging the financial strength of business- helps in anticipating the degree of organisation's ability to earn
profit. Investors and shareholders can utilise this information to settle on their financial decision.

5. Making comparison and selection of appropriate policy- helps in making comparative study of the profitability
of the entity with other entities engaged in the same trade, it helps in choosing sound business policy.

6. Forecasting and preparing budgets- helps identify the weak areas of the organization so that management can
take corrective measures to remove the shortcomings, helps management to forecast it and prepare budget
accordingly.
Types of Financial Statements
 Balance Sheet
• It is a tabular sheet of balances of assets, liabilities, and equity.
• It mainly represents the Basic accounting Equation.
• As we just noted that the balance sheet is nothing but a set of
balances. Balances can change everyday. Therefore, a balance
sheet is presented at the end of a particular date. The date for
presenting balance sheet for the annual report is the last date
of the financial year.
 Income Statement
• Statement of revenues and expenses.
• It also shows whether a company is making profit or
loss for a given period
• Unlike balance sheet, income statement is prepared for
a certain period. It can be prepared weekly, monthly or
yearly.
 Statement Of Cash Flow
• A cash flow statement is the statement of cash inflow
and outflow.
• It is simply a statement of cash generation and its use
by different activities categorized under three different
board activities.
o Operating activities
o Investing Activities
o Financing Activities
 Statement Of Changes in Equity
• It is a statement showing the capital investment
by stockholders and the retained earnings of
the company.
• Statement of Changes in Equity is the
reconciliation between the opening
balance and closing balance of
shareholder's equity. It is a financial
statement which summarizes the
transactions related to the shareholder's
equity over an accounting period
 Limitations of Financial Accounting
• Lacks Originality because it is only rearrangement of data appearing in
account books.
• Indicates only the historical data and not the future.
• Indicates fund flow only in summary form and does not show various
changes which take place continuously.
• When both the aspects of the transaction are current, they are not
considered.
• When both the aspects of the transaction are non-current, even then
they are not included in the statement.
• Not an ideal tool for financial analysis.
Thank You