Financial Statements

Financial statements, as used in corporate business houses, refer to a set of reports and schedules which an accountant prepares at the end of a period of time for a business enterprise. The financial statements are the means with the help of which the accounting system performs its main function of providing summarized information about the financial affairs of the business. These statements comprise Balance Sheet or Position Statement and Statement of Profit & Loss or Income Statement. Of course to give a full view of the financial affairs of an undertaking, in addition to the above, the business may also prepare a Statement of Retained Earnings and a Cash Flow Statement. In India, every company has to present its financial statements in the form and contents as prescribed under Section 211 of the Companies Act 1956. The significance of these statements are given below:

Balance Sheet or Position Statement: Balance sheet is a statement showing the nature and amount of a company’s assets on one side and liabilities and capital on the other. In other words, the balance sheet shows the financial position on a particular date usually at the end of one year period. Balance sheet shows how the money has been made available to the business of the company and how the money is employed in the business.
Statement of Profit & Loss or Income Statement: Earning profit is the principal objective of all business enterprises and Statement of Profit & Loss or Income Statement is the document which indicates the extent of success achieved by a business in meeting this objective. Profits are of primary importance to the Board of directors in evaluating the management of a company, to shareholders or potential shareholders in making investment decisions and to banks and other creditors in judging the loan repayment capacities and abilities of the company. It is because of this that the profit and loss or income statement is regarded as the primary statement and commands a careful scrutiny by all interested parties. It is prepared for a particular period which is mentioned along with the title of these statements, which includes the name of the business firm also.
Cash Flow Statement: This is a statement which summarizes for the period, the cash available to finance the activities of an organization and the uses to which such cash have been put. A statement of cash flow reports cash receipts and payments classified according to the organization’s major activities i.e., operating activities, investing activities and financing activities. This statement reports the net cash inflow or outflow for each activity and for the overall business. The cash flow statement is to be prepared according to the Accounting Standard 3 (Revised) “Cash Flow Statement”. The details of this statement have been discussed in a separate study.