- 1 Meaning of Financial Statements
- 2 Nature of Financial Statements
- 3 Objectives of Financial Statements of a Company
- 4 Types of Financial Statements
- 5 Important Features of Presentation
- 6 Uses and Importance of Financial Statements
- 7 Limitations of Financial Statements
- 8 Summary
Meaning of Financial Statements
Financial statements of a Company are the introductory and formal periodic reports through which the commercial operation communicates fiscal information to its possessors and other external parties which include investors, duty authorities, government, workers, etc. These typically relate to (a) the balance distance ( position statement) at the end of the counting period, and (b) the statement of profit and loss of a company. Nowadays, the cash inflow statement is also taken as an integral element of the financial statements of a company.
Nature of Financial Statements
The chronologically recorded data about events expressed in financial terms for a defined period are the base for the medication of journal financial statements which reveal the financial position on a date and the financial results attained during a period. The American Institute of Certified Public Accountants states the nature of the financial statements of a company as, “ the statements. set for presenting a journal review of the report on the progress of the operation and dealing with the status of investment in the business and the results achieved during the period under review. They reflect a combination of recorded data, counting principles,, and particular judgments”.
The following points explain the nature of the financial statements of a Company:
1. Recorded Facts:
Financial statements of a company are prepared on the base of data in the form of cost data recorded in account books. The original cost or literal cost is the base of recording deals. The numbers of colorful accounts similar to cash in hand, cash at the bank, trade receivables, fixed means, etc., are taken as per the numbers recorded in . the account books. The means bought at different times and at different prices are put together and shown at costs. As these are not grounded on request prices, the financial statements don’t show the current financial condition of the concern.
2. Accounting Conventions:
Certain Account conventions are followed while preparing the financial statements of a company. The convention of valuing force at cost or request price, whichever is lower, is followed. The valuing of means at cost lower deprecation principle for balance distance purposes is followed. The convention of materiality is followed in dealing with small particulars like pencils, pens, postage prints, etc. These particulars are treated as expenditures in the time in which they’re bought even though they’re means in nature. The stationery is valued at cost and not on the principle of cost or request price, whichever is lower. The use of account conventions makes fiscal statements similar, simple, and realistic.
Financial statements of a company are prepared on certain basic assumptions (pre-requisites) known as postulates such as the going concern postulate, money measurement postulate, realization postulate, etc. The going concern postulate assumes that the enterprise is treated as a going concern and exists for a longer period. So the assets are shown on a historical cost basis. The money measurement postulate assumes that the value of money will remain the same in different periods. Though there is a drastic change in the purchasing power of money, the assets purchased at different times will be shown as the amount paid for them. While preparing the statement of profit and loss the revenue is included in the sales of the year in which the sale was undertaken even though the sale price may be received over several years. The assumption is known as the realization postulate.
4. Personal Judgements:
Under more than one circumstance, data and numbers presented through financial statements are grounded on particular opinions, estimates, and judgments. The deprecation is handed taking into consideration the useful profitable life of fixed means vittles for doubtful debts are made on estimates and particular judgments. In valuing force, cost, or request value, whichever is lower is being followed. While deciding either the cost of force or the request value of force, numerous particular judgments are to be made grounded on certain considerations. Particular opinions, judgments, and estimates are made while preparing the financial statements to avoid any possibility of embellishment of means and arrears, income, and expenditure, keeping in mind the convention of traditionalism.
Objectives of Financial Statements of a Company
Financial statements of a company are the introductory sources of information for the shareholders and other external parties to understand the profitability and financial position of any business concern. They give information about the results of the business concern during a specified period in terms of means and arrears, which gives the base for taking opinions. Therefore, the primary ideal of financial statements is to help the druggies in their decision- timber. The specific objects include the following:
I) To provide information about the economic resources and obligations of a business:
They’re set to give acceptable, dependable, and journal information about profitable coffers and scores of a business establishment to investors and other external parties who have limited authority, capability or coffers to gain information.
II) To provide information about the earning capacity of the business:
They’re to give useful fiscal information which can gainfully be utilized to prognosticate, compare and estimate the business establishment’s earning capacity.
III) To provide information about cash flows:
They’re to give information useful to investors and creditors for prognosticating, comparing and assessing, implicit cash overflows in terms of quantum, timing, and related misgivings.
IV) To judge the effectiveness of management:
They supply information useful for judging management’s ability to utilize the resources of a business effectively.
V) Information about activities of business affecting society:
They’ve to report the conditioning of the business organization affecting the society, which can be determined and described or measured and which is important in its social terrain.
VI) Disclosing accounting policies:
These reports have to give the significant programs, generalities followed in the process of account, and changes taken up in them during the time to understand these statements in a better way.
Types of Financial Statements
The financial statements of a company generally include two statements a balance distance and a statement of profit and loss which are needed for external reporting and also for internal requirements of the operation like planning, decision- timber and control. Piecemeal from these, there’s also a need to know about movements of finances and changes in the fiscal position of the company. For this purpose, a statement of changes in the fiscal position of the company or a cash inflow statement is set.
Every company registered under The Companies Act 2013 shall prepare its balance distance, statement of profit and loss, and notes to regard thereto in agreement with the manner specified in the revised Schedule III to the Companies Act, 2013 to harmonize the exposure demand with the account norms and to meet with new reforms. About this, the Ministry of Corporate Affairs (MCA) had specified a ( Revised) Schedule VI to the Companies Act, 1956 (vide Announcement dated 28.02.2011). It’s applied to the financial statements prepared for all fiscal ages beginning on or after April 01, 2011, by the Indian Companies.
Important Features of Presentation
1. It applies to all Indian companies preparing financial statements commencing on or after April 01, 2011.
2. It doesn’t apply to (i) Insurance or Banking Companies, (ii) Companies. which a form of balance distance or income statement is specified under any other Act.
3. Account norms shall prevail over Schedule III of the Companies Act, 2013.
4. Disclosure on the face of the financial statements or in the notes is essential and obligatory.
5. Terms in the revised Schedule carry the meaning as defined by the applicable account norms.
6. Balance to be maintained between inordinate details that may not help Druggies with financial statements and not furnishing important information.
7. Current and current bifurcation of means and arrears is applicable.
8. Rounding off conditions is obligatory ( relate box 1).
9. Vertical format for a donation of fiscal statement is specified.
10. Dis benefit balance in the statement of profit and loss to be bared as a negative figure under the head “ Supernumerary”.
11. Obligatory exposure for share operation plutocrat pending allotment.
12. ‘ Sundry Debtors’ and ‘Sundry Creditors’ were replaced by the term’s trade Receivables and Trade Payables.
The shareholders’ funds are sub-classified on the face of the balance sheet.
a) Share Capital
b) Reserves and Surplus
c) Money received against Share Warrants
a) Share Capital
Exposures relating to partake capital are to be given in notes to accounts. The following additions/ variations are significant
a) For each class of shares, recognition of the number of shares outstanding in the morning and at the end of the reporting period is needed.
b) The rights, preferences and restrictions attached to each class of shares including restrictions on the distribution of tips and prepayment of capital.
c) To bring clarity regarding the identity of the ultimate possessors of the company
i) Disclosure of shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by accessories or associates of the holding company or the ultimate holding company in total.
ii) Disclosure of shares in the company held by each shareholder holding further than 5 shares specifying the number of shares held.
iii) Disclosure of the following for the period of 5 times in continuously antedating the date of the balance distance
— Aggregate number and class of shares distributed as completely paid up according to contracts without payment being entered in cash.
— Aggregate number and class of shares distributed as completely paid up by way of perk shares.
— Aggregate number and class of shares bought back.
This may be noted that the information on shareholders’ finances is presented on the face of financial statements and limited only to broad and significant particulars. Details are given in Notes to Accounts.
d) for every class of share capital
i) The number and quantum of shares authorized.
ii) The number of shares issued, subscribed, completely paid, and subscribed. but not completely paid.
iii) Par value per share.
iv) Reconciliation of the number of shares outstanding at the morning and end of the accounting period.
v) Rights, preferences, and restrictions attaching each class of shares including restrictions on the distribution of tips and Prepayment of capital.
vi) an Aggregate number of shares concerning each class in the company held by its company, its ultimate holding company including shares held by or by accessories or associates of the company or the last word company.
vii) Shares reserved for issue under options and contracts/ commitments for the trade of shares/ disinvestment, including terms and quantum.
viii) For a period of 5 times in continuously pacing the date at which balance distance is set for
(a) Shares reserved under contracts/ commitments.
(b) Number and class of shares bought back.
( c) Number and class of shares distributed for consideration other than cash and perk shares.
ix) Terms of any securities convertible into equity/ preference shares
issued along with the foremost date of conversion in descending order, starting from the furthest similar date.
x) Calls overdue (aggregate).
xi) Topped shares (amount first paid up).
b. Reserve & Surplus
Reserves and Supernumerary need to be classified as
i) Capital Reserve
ii) Capital Redemption Reserve
iii) Securities Premium Reserve
iv) Debenture Redemption Reserve
v) Revaluation Reserve
vi) Share Options Outstanding Account
vii) Other Reserves ( Specifying nature and purpose)
viii) Supernumerary Balance in the statement of profit and loss; telling allocations and Appropriation similar as tips, perk shares, transfers to/ from the reserve, etc.
Significant additions/ variations regarding exposure of reserve and surplus are as follows
a) A reserve specifically represented by allocated investments shall be nominated as a “ Fund”.
b) The ‘ Disbenefit’ balance of the statement of profit and loss shall be shown as a negative figure under the ‘ Supernumerary’ head.
c) The balance of “ Reserve and Supernumerary” after confirming the negative balance of Supernumerary, if any, shall be shown under “ Reserve and Supernumerary” read indeed
if the performing figure is‘ negative’.
d) Share options outstanding account has been recognized as a separate item underserved and Supernumerary’. ICAI’s Guidance Note on Accounting for Hand share- grounded payments require a credit balance in the stock option outstanding Account to be bared in the balance distance under a separate heading between share capital and reserves and fat as a part of shareholders fund.
c. Money Received against share warrants
Money received against share warrants is to be disclosed as a separate line item under ‘shareholder’s fund’.
- Current and Non-current Classification
— if it’s involved in reality’s operating cycle or,
— is anticipated to be realized/ settled within twelve months or,
— if it’s held primarily for trading or,
— are cash and cash fellow or,
— if the reality doesn’t have unconditional rights to postpone the agreement of liability for at least 12 months after the reporting period,
— Other means and arrears are current.
— Primary charges are to be written off fully in the time in which similar charges are incurred. They should be written off first from securities decoration and the balance if any, from the statement of profit & loss.
— Borrowing costs similar to abatements on the issue of debentures could be written off over the loan period.
Share operation plutocrat pending allotment
Share operation plutocrat not exceeding the issued capital and to the extent non-refundable shall be classified as non-current. It’ll be shown on this face of the balance distance as share operation plutocrat pending allotment.
Total borrowings are categorized into long-term borrowings, short-term borrowings, and current majorities to long-term debt.
(i) Loans that are repayable in a further than twelve months/ operating cycle are classified as long-term borrowings on the face of the balance distance.
( ii) Loans repayable on demand or whose original term isn’t further than twelve months/ operating cycle are classified as short-term borrowings on the face of the balance distance.
(iii) Current majorities to long-term loan include quantum repayable within twelve months/ operating cycle under other current arrears with Note to Account.
Prolonged duty means/ arrears are always current. This is in agreement with IAS-I.
Sundry creditors have been replaced with the term Trade payables and are classified as current and current. Trade payables to be settled beyond 12 months from the date of the balance distance or beyond the operating cycle are classified under “ other long-term arrears” with a Note to Account. For illustration, the purchase of goods and services in the normal course of business. The balance of trade payables is classified as current arrears on the face of the balance distance.
The quantum of provision settled within 12 months from the balance distance date or within the operating cycle period from the date of its recognition is classified as short-term vittles and shown under current arrears on the face of the balance distance. Others are depicted as long-term vittles under non-current arrears on the face of the balance distance.
( i) Loans that are repayable in a further than twelve months/ operating cycle are classified as long-term borrowings on the face of the balance distance.
There’s no change in the treatment of fixed means. Both palpable and impalpable means are current. This may also be noted if the useful life of the asset is lower than 12 months, it’ll still fall undercurrent.
Investments are also classified into current and non-current orders. Investments anticipated to realise within twelve months are considered as current investments under current means. Others are classified as non-current investments under non-current means. Both are still shown on the face of the balance distance.
All supplies are always treated as current.
Trade receivables realized beyond twelve months from the reporting date/ operating cycle starting from the date of their recognition are classified as “ Other noncurrent means” under the head non-current means with Note to Accounts. For illustration, trade of goods or services rendered in the normal course of business. Others are classified as current means and shown on the face of the balance distance.
Cash and cash original
It’s always current still, quantities which qualify as cash and cash coequals as per IAS-3 are shown then. The supremacy is accorded to AS over Schedule III, and cash and cash coequals are to the bared in agreement to IAS-3.
Uses and Importance of Financial Statements
The druggies of financial statements of a company include operation, investors, shareholders, creditors, government, bankers, workers, and the public at large. Financial statements give the necessary information about the performance of the operation to these parties interested in the organization and help in taking Applicable profitable opinions. It may be noted that the financial statements constitute an integral part of the periodic report of the company in addition to the director’s report, adjudicator’s report, commercial governance report, and operation discussion and analysis.
The various uses and importance of financial statements are as follows:
1. Report on stewardship function
Financial statements report the performance of the operation to the shareholders. The gaps between the operation performance and power prospects can be understood with the help of fiscal statements.
2. Basis for fiscal policies
The financial programs, particularly taxation programs of the government, are related to the fiscal performance of commercial undertakings. The fiscal statements give introductory input for artificial, taxation, and other profitable programs of the government.
3. Basis for granting credit
Commercial undertakings have to adopt finances from banks and other financial institutions for different purposes. Credit-granting institutions take opinions grounded on the fiscal performance of the undertakings. Therefore, fiscal statements form the Base for granting credit.
4. Basis for prospective investors
The investors include both short-term and long-term investors. Their high considerations in their investment opinions are the security and liquidity of their investment with reasonable profitability. Fiscal statements help investors to assess long-term and short-term solvency as well as the profitability of the concern.
5. Guide to the value of the investment already made
Shareholders of companies are interested in knowing the status, safety and return on their investment. They may also need the information to take opinions about the durability or termination of their investment in the business. Fiscal statements give information to the shareholders in taking similar important opinions.
6. Aids trade associations in helping their members
Trade associations may assay the financial statements for furnishing services and protection to their members. They may develop standard rates and design a livery system of accounts.
7. Helps stock exchanges
Fiscal statements help the stock exchanges to understand the extent of translucency in reporting on fiscal performance and enable them to call for the required information to cover the interest of investors. The fiscal statements enable the Stockbrokers to judge the fiscal position of different enterprises and take opinions about the prices to be quoted.
Limitations of Financial Statements
Though utmost care is taken in the medication of the financial statements and giving detailed information to the druggies, they suffer from the following limitations
1. Don’t reflect on the current situation
Fiscal statements are prepared on the base of literal cost. Since the purchasing power of plutocrats is changing, the values of means and arrears shown in the fiscal statement don’t reflect the current request situation.
2. Assets may not realise
The account is done on the base of certain conventions. Some of the means may not realize the stated values if the liquidation is forced on the company. Means shown in the balance distance reflect simply unexpired or unamortized costs.
Financial statements are the outgrowth of recorded data, counting generalities and conventions used and particular judgments made in different situations by the accountants. Hence, bias may be observed
in the results, and the fiscal position depicted in fiscal statements may not be realistic.
4. Aggregate information
Financial statements of a company show aggregate information but not detailed information. Hence, they may not help the druggies in decision- making important.
5. Vital information missing
Balance distance doesn’t expose information relating to the loss of requests, and conclusion of agreements, which have a vital bearing on the enterprise.
6. No qualitative information
Fiscal statements contain only financial information but not qualitative information like artificial relations, artificial climate, labour relations, quality of work, etc.
7. They’re only interim reports
Statement of Profit and Loss discloses the profit/ loss for a specified period. It doesn’t give an idea about the earning capacity over time also, the fiscal position reflected in the balance distance is true then, and the likely change on a future date isn’t depicted.
Financial statements aren’t free from limitations. They give only aggregate information to satisfy the general-purpose requirements of the druggies. They’re specialized statements understood by only persons having some counting knowledge. They are about the organization’s performance in terms of quantitative changes but not in qualitative terms like labor relations, quality of work, workers’ satisfaction, etc. The fiscal statements are neither complete nor accurate as the inflow of income and charges are insulated using stylish judgment piecemeal from accepted generalities. Hence, these statements need proper analysis before their use in decisions- timber.