{"id":726,"date":"2019-10-16T10:38:39","date_gmt":"2019-10-16T10:38:39","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=726"},"modified":"2021-03-23T11:56:51","modified_gmt":"2021-03-23T06:26:51","slug":"basic-financial-statements","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/basic-financial-statements\/","title":{"rendered":"What are the Basic Financial Statements?"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Financial\nStatements are the reports that present the financial performance and financial\nposition of a company for a particular period, usually a fiscal year. Financial\nstatements consist of a set of records that has to be maintained by the\ncompany,&nbsp;sole proprietorship&nbsp;or\nbusinesses that include books of account, balance sheet, trial balance, trading\naccount, Profit and loss account, cash flow statement, statement of owner\u2019s\nequity, and income statement.<\/p>\n\n\n\n<p>The\nfinancial statements are used by outsiders such as creditors, investors,\ncustomers, etc. to know more about the entity\u2019s financial aspects. A public\ncompany has to present these statements to regulators as well on the prescribed\ninterval of time.<\/p>\n\n\n\n<p>A financial statement is the main source of information for decision-makers before investing in the company or when entering into a deal such as a <a href=\"https:\/\/corpbiz.io\/learning\/merger-or-amalgamation-of-company-with-foreign-company\/\"><strong>merger &amp; amalgamation<\/strong><\/a>.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/basic-financial-statements\/#Understanding_Financial_Statements\" >Understanding Financial Statements<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/basic-financial-statements\/#Objectives_of_Financial_Statements\" >Objectives of Financial Statements<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/basic-financial-statements\/#Users_of_Financial_Statements\" >Users of Financial Statements<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/basic-financial-statements\/#Kinds_of_Financial_Statements\" >Kinds of Financial Statements<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/basic-financial-statements\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Understanding_Financial_Statements\"><\/span>Understanding Financial Statements<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The\nfinancial statement records the financial activities and transactions that have\noccurred in an entity. These are written reports presenting the financial\nstrength and liquidity position of a company. These reports reflect the effect\nof financial transactions on business as a whole.<\/p>\n\n\n\n<p>Financial\nstatements are prepared at the end of the fiscal year when all the books of\naccounts are maintained to date and duly audited. Financial statements are\nuseful for stakeholders such as shareholders, creditors, investors, government,\nand other interested parties.<\/p>\n\n\n\n<p><strong>Preparation of financial statements depends upon the following elements such as:<\/strong><\/p>\n\n\n\n<ul><li><strong>Recorded Information:<\/strong>&nbsp;For the preparation of financial      statements, documented facts in books of accounts are considered to take into account the figures of fixed assets, liabilities, trade receivable &amp; payables, etc.<\/li><li><strong>Assumptions<\/strong>: Assumption plays a vital role in the formulation of financial statements. Few assumptions are taken as self-evident principles.<\/li><li><strong>Personal Opinion<\/strong>: Financial Statements shall be prepared based      on accounting statements; however, there is a scope of own judgment also while making statements, and these play a significant role during      preparation.<\/li><li><strong>Conventions of Accounting<\/strong>: Accounting Standards<sup><a href=\"https:\/\/www.mca.gov.in\/MinistryV2\/accountingstandards1.html\"><strong>[1]<\/strong><\/a><\/sup> prescribe the      applicable convention in accounting. These conventions are required to be adhered to while formulating financial statements.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Objectives_of_Financial_Statements\"><\/span>Objectives of Financial Statements<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are\ntwo types of objectives that an entity strives to achieve via its financial\nstatements:<\/p>\n\n\n\n<ul><li>Primary objectives<\/li><li>Secondary objectives<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Following are the primary objectives of Financial\nstatement:<\/h3>\n\n\n\n<ul><li>With the help of financial statements, there is a clear understanding of the profit earning potential of an entity. Also, it focuses on whether profits have increased or decreased as compared to the preceding year.<\/li><li>Financial statements help in estimating whether the business can repay its debt in the short term or long term, i.e., solvency.<\/li><li>Financial reports let an entrepreneur compare the performance of the company over the past year that leads to the conclusion about the growth of the company.<\/li><li>The company can access the potential strengths and weaknesses of an organization. By knowing the areas where the company lacks behind, it can take corrective actions to remove the obstacles.<\/li><li>It helps in communicating the financial position of the company to the      concerned parties. Apart from promoters and employees, there are several stakeholders, including shareholders, debenture holders, creditors, investors, government, etc., who are connected with the entity and are interested to know about its potential.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Specific secondary objectives of financial statements are:<\/h3>\n\n\n\n<ul><li>By providing the periodical statement of earnings, one can evaluate the earning capacity of the firm.<\/li><li>The financial statement helps in decision making related to the merger, amalgamation, and takeover.<\/li><li>The company can estimate its capacity to enter diversification or expansion plans.<\/li><li>The government gets the necessary information about the company that helps in proper fixation of taxation, duties, and price control.<\/li><li>Any deviation between the projected budget and actual performance can be evaluated to take corrective<\/li><li>Internal management forms internal policies based on financial statements.<\/li><li>Through financial reports, shareholders build their confidence and are assured about the safety of their investments.<\/li><li>Credit rating companies analyze the financial position of the company through these statements for proper credit ratings.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Users_of_Financial_Statements\"><\/span>Users of Financial Statements<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Financial\nStatements are considered as a useful tool to serve the common purposes of the\nusers of accounting information. Financial reports are used to analyze the\nfinancial position of the company for various reasons. Following are the\ninternal &amp; external users of financial reports:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Internal Users<\/h3>\n\n\n\n<ul><li>Employees<\/li><li>Management<\/li><\/ul>\n\n\n\n<p>&nbsp;External Users<\/p>\n\n\n\n<ul><li>Trade creditors<\/li><li>Investors<\/li><li>Government<\/li><li>Customer<\/li><li>Lenders<\/li><li>Society and public at large <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Kinds_of_Financial_Statements\"><\/span>Kinds of Financial Statements<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Following are the types of financial statements:<\/strong><\/p>\n\n\n\n<p><strong>1.<\/strong> <strong>Balance Sheet:&nbsp;<\/strong><\/p>\n\n\n\n<p>It is one of the components of a financial statement that represent the financial position of the business. It is also known as the statement of financial position or financial condition. Balance Sheet has two columns, i.e., Assets &amp; liability side. Details of the assets and capital contributions are shown on the asset side, while its debt and liabilities represent the liability side.&nbsp; In a nutshell, the Balance Sheet shows the funds available to the company and its utilization.<\/p>\n\n\n\n<p><strong><em>A Balance Sheet consists of three elements<\/em><\/strong><strong>:<\/strong><\/p>\n\n\n\n<ul><li><strong>Assets:&nbsp;<\/strong>Resources controlled by the business are known as assets. They can be tangible or intangible assets or can be classified as current &amp; non-current assets. Current assets are those that can be      converted into cash within a year<\/li><li><strong>Liability<\/strong>: Liability is the amount of debt owed by the company to lenders and creditors. Liabilities are classified into current      liabilities, which are payable within a year such as a bill payable,      creditors, etc. and non-current liabilities, which are not payable within a year such as a loan, debentures, etc.<\/li><li><strong>Owner\u2019s equity<\/strong>: It includes the amount of capital contribution by an owner. It is the classification of shares paid-up, subscribed, unpaid, or outstanding. <\/li><\/ul>\n\n\n\n<p><strong>2. Income Statement:&nbsp;<\/strong><\/p>\n\n\n\n<p>Income Statement reveals the financial\nperformance of the company in terms of net profit or loss that occurred at the\nend of the financial year, also known as Profit &amp; Loss account. P&amp;L\nAccount gives the financial performance of the business over a time period and consists\nof two elements, i.e., Revenue (all cash inflows in the company) and Expense\n(all cash outflow from the company)<\/p>\n\n\n\n<ul><li><strong>Cash Flow Statement:&nbsp;<\/strong><\/li><\/ul>\n\n\n\n<p>Cash flow statement represents the\nmovement in cash and bank balances. Following are the segments in which cash\nflow moves:<\/p>\n\n\n\n<ul><li>Operating Activities<\/li><li>Investing\nActivities<\/li><li>Financial\nActivities<\/li><li>Statement of Change in Equity:<strong>&nbsp;<\/strong><\/li><\/ul>\n\n\n\n<p>This statement gives the details of the movement in the owner\u2019s equity. This is also called statement of retained earnings at the end of the period i.e. it is a profit at the end of the period to pay off the liabilities. The statement of retained earnings may as well be known as owner\u2019s equity statement, shareholders equity statement or an equity statement.<\/p>\n\n\n\n<p><strong>Retained Earnings = Beginning of Retained Earnings +\nNet Income \u2013Paid Dividends<\/strong><\/p>\n\n\n\n<p>&nbsp;Following components are used to derive the\nmovement in owner\u2019s equity:<\/p>\n\n\n\n<ul><li>Net profit or loss during the year as per Income Statement<\/li><li>Share capital raised or repaid during the period<\/li><li>Dividend payment<\/li><li>Changes in accounting policy and its effects. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Financial statements include the income statements and positional statements that ensure to represent the actual financial position of the business to management and external stakeholders. This opens the window for decision making and strategic planning, as well.&nbsp;Proper understanding of these statements goes a long way in the promotion of the financial health of the organization. For any assistance for the preparation of financial reports, contact us.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/what-are-mergers-and-acquisitions-a-detailed-outlook\/\">What are Mergers and Acquisitions? A Detailed Outlook\n<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Financial Statements are the reports that present the financial performance and financial position of a company for a particular period, usually a fiscal year. Financial statements consist of a set of records that has to be maintained by the company,&nbsp;sole proprietorship&nbsp;or businesses that include books of account, balance sheet, trial balance, trading account, Profit and [&hellip;]<\/p>\n","protected":false},"author":20,"featured_media":729,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[128],"tags":[130,127,129],"acf":{"service_id":"230"},"authorName":"Archita Bhattacharjee","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/03\/WhatsApp-Image-2020-03-18-at-11.26.19-AM-1.jpeg","authorDescription":"Archita Bhattacharjee is working as Legal Analyst (Team Lead, Research &amp; Development) at Corpbiz and has proving experience about 2 years as Corporate Legal Researcher in law firms as well as Rajya Sabha and authors in diverse publications. She has refined her skills by representing India in Paris, France and the University of Leiden over implications of International Humanitarian and Criminal Law being certified member of many Legal Centers.","postViews":9104,"readingTime":5,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/726"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=726"}],"version-history":[{"count":21,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/726\/revisions"}],"predecessor-version":[{"id":27999,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/726\/revisions\/27999"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/729"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=726"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=726"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=726"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}