The major purpose of financial statement is to provide an overview of the company’s overall performance of the company’s operations and also assess the company’s worth during the year. Financial statement not only assists the financial managers but also the outsiders like creditors, stockholders etc. The financial statements of any company provides an overall regarding the stockholders, in assessing the company’s growth, investment opportunity ,dividend profile etc after that note all the stakeholders made appropriate decisions regarding the firm’s future’s perspective..
Financial statements are also helpful in submitting the tax return of the year (Besley, Brigham, 2001). In basic terms financial statement is comprises on Profit & Loss Statement, Balance Sheet, Statement of cash flows, and on Statement of Changes in Equity. There are mainly four types of information is available in financial statements 1) Profit & Loss Statement 2) Balance Sheet 3) Statement of cash flows and 4) Statement of Changes in Equity. All the statements have own importance.
Profit & Loss Statement debates over the company’s revenue generation power, cost behavior and structure and in the end on Net Income. Balance Sheet provides a more clear reflection of any company’s performance in recent past. The balance sheet is an ideal starting point for the analysis of any organization’s resources and obligations including the liquidity and solvency of the organization. The balance sheet provides an overview regarding the company’s financial position. In the same time the balance sheet also discussed about the company’s assets, liabilities and owners equity.
Balance Sheet are collective and cumulative in nature, as they reflect the effects of all the transactions that took place since the start of the business to the last date accounted for in that financial year. Whereas, income statement focuses more on the cost and profitability. Cash flow statement discussed over the company’s operating activities (review the increase and decrease in current assets and current liabilities), investing activities (review over the sale and purchase of fixed assets) and financing activities (review over issuance/payment of loan, issuance/repurchase of share, dividend paid etc) during the year.
It also discussed on the in flow and outflow of the cash and also on the cash equivalents. While the Statement of Changes in Equity assess the company’s equity financing which is in the shape of stock and also focuses on the retained earning and dividend section which is the pivotal part of this statement. The most relying outside factors that makes an impression on the financial statements are stated below: • Frequently changes in the tax percentages make an impact on the firm’s net income, dividend, EPS, owner’s equity, stock price, etc (Besley, Brigham, 2001).
• Government’s regulation on any appropriate business slight distorts the financial statements of the company (Besley, Brigham, 2001). • Events happening after balance sheet dates like case filed in the court of law make a negative impact on the reported figures of the company (Garrison, 2004). • Fluctuation the interest rate percentage makes an impression on the interest expense of the company and also on the prices of the bonds.
Change in method of revenue recognition (Percentage Completion Method, Cost Recovery Method, and Installment Sales Method etc), choice of inventory valuation technique (LIFO, FIFO etc), depreciation method and also choice of depreciation method with respect to Tax based Accounting makes an impression on the Earnings quality and also on the Financial Reporting. Ratios are guidelines to evaluate a company’s financial position and the efficiency and effectiveness of its operations. It also enables firms to make comparisons with its competitors or the industry as a whole, or even with itself, i. e. with its own performances in the past.
Ratios also act as an alarm or a siren indicating areas of concern for firms, i. e. areas requiring further investigation. Ratios are not only used by the managers that are internal members of the organisation, but creditors, investors, auditors, are common examples of outsiders or people external to the organisation who might be interested in closely examining a firm’s performance by monitoring its ratios.
Reference Besley, Brigham, Scott, Eugene F. (2001). Principles of Finance. Florida: Harcourt College Publishers. Noreen, Eric W. , Peter C. Brewer, Ray H. Garrison. Managerial Accounting. 11. 2004.