Financial Statements – Types, Objectives, Components

4. Components of Financial Statements

4.1 Balance Sheet 

Balance Sheet is a statement that shows the net worth at the end of financial year i.e. March 31, 20XX. Balance sheet contains:

4.2 Assets

Assets in balance sheet shows the amount of assets an entity holds on the date of balance sheet.

4.3 Liabilities

Liabilities in balance sheet shows the amount of liability an entity is liable to pay in future (determined on the date of balance sheet).

4.4 Equity & Reserves

Equity and reserves is the amount of capital entity has including reserves balances, if any. Higher amount of equity and reserves indicate higher net worth of the entity.  

5. Statement of profit and loss or income and expenditure account ( as the case may be ) for the financial year

A company prepares statement of profit and loss to show the net result (profit or loss) from the revenue earned and expense incurred. In case of a company carrying on activity not for profit, income and expenditure account is prepared for the financial year which shows the income earned and expense incurred during the year, showing surplus (when income is more than expense) or deficit (when expense is more than income). The main purpose is to know how much profit or loss the entity has made during a particular year. 

6. Cash flow statement for the financial year

Cash flow statements reports the sources of cash and uses of that cash. Cash flow can be generated from/ used in the following activities:

6.1 Operating Activities

Cash from operating activities focuses on the cash inflows and outflows from a company’s operations such as purchase, sale, money received from debtors, paid to creditors etc.

6.2 Investing Activities

Cash flow from investing activities are cash flow arising from investment gains or losses and changes resulting from amounts spent on investments in capital assets. Example: purchase of plant, interest income on investment, etc.

7. Statement of changes in equity ( If applicable )

Statement of changes in equity is statement that shows reconciliation of beginning and ending balances in a company’s equity during a reporting period. It represents any change in equity that took place during the year. Any explanatory notes annexed to, or forming part of, any statement referred above These are working notes or information that are relevant and are required to be disclosed in relation to any of the statements discussed above. These are critical to identify the additional information relating to an entity. Explanatory notes contain details about the transactions (accounted and not accounted but disclosed).

8. Repository of Financial statements at Single place

Taxmann’s accounts and audit module accountsandaudit.taxmann.com contains repository of financial statements of key industries. Repository of Financial Statements can be accessed here. 

9. Importance of Financial statements to various users

Audited financial statements can be of great importance to various groups such as discussed below:

9.1 Importance to Management

Financial statements help the management to understand the position, progress and prospects of business by providing upto date accurate and systematic financial information. It enables management to formulate appropriate policies and courses of action for the future. By comparative analysis of financial statements, management can know the progress and position of entity and make suitable changes in the policies to prevent adverse situations in future.

9.2 Importance to Shareholders

Results of company’s activities are reported to shareholders at the annual general body meeting in the form of financial statements. Financial statements help shareholders to know about the efficiency and effectiveness of management and financial strength and earning capacity of the company.

9.3 Importance to Lenders or Creditors

Before lending loan or providing credit, lenders or creditors check the credit worthiness of company or entity and the financial statements serve as a useful guide for the present and future liquidity, profitability and long-term solvency position of a company on the basis of which loans or credit are provided by such lenders or creditors. 

9.4 Importance to Public

Published financial statements helps various groups of society such as financial analysts, lawyers, trade associations, trade unions, financial press, research scholars, teachers, etc. (which are not directly connected with business) to know the position, progress and prospects of a business entity. These groups are generally interested in analysing, judging and commenting on business entity.