Meaning: Financial statement is a collection of data organized according to logical and consistent accounting procedures.

In other words, financial statements are the outcome of summarizing process of accounting.

Definition

Smith and Asburn define financial statements as the end product of financial accounting in a set of financial statements prepared by the accountant of a business enterprisethat purport to reveal the financial position of the enterprise, the result of its recent activities, and analysis of what has been done with earnings.

NATURE OF FINANCIAL STATEMENTS

Recorded facts GAAPs Postulates (Assumptions) Personal judgements

COMPOSITION OF FINANCIAL REPORTS

1. Financial statements a)Profit and Loss account (Income Statement) b) Balance Sheet

2. Reports a)Directors report b)Chairmans speech (Delivered at the Annual General Meeting) c) Auditors report 3. Schedules a) Schedule of Fixed assets b) Schedule of Longterm investements c) Schedule of inventories d) Schedule of reserves e) schedule of longterm liabilities etc.,
4. Explanatory notes a) Depreciation methods b) Inventory valuation methods c) Details of contingent liabilities etc., 5. Statements of changes in financial position a) Fund flow statement b) Cash flow statement

OBJECTIVES OF FINANCIAL STATEMENTS

1. To provide adequate information about the financial performance and the assets, liabilities and capital of the business entity. 2. To provide useful information about predicting, comparing and evaluating the earning capacity of the business entity. 3. To provide required information to different interested parties in the business entity. 4. To provide needed information about changes in economic resources and obligations.

LIMITATIONS OF FINANCIAL STATEMENTS

1. 2. 3. 4. 5. 6. 7. 8. Fulfilment of statutory requirements Historical data Interim reports Emphasis on only quantitative information GAAP Personal judgements Opportunities for Manipulation (Window dressing) Failure to recognize the changes in the price level

USE AND IMPORTANCE OF FINANCIAL STATEMENTS

As a basis for granting credit As guide to advise dividend action As informative for prospective investors To determine the legality of dividends As a guide to the value of investment already made As basis for price or rate regulation As a basis for taxation As an aid to government supervision

PARTIES INTERESTED IN FINANCIAL STATEMENTS

MANAGEMENT CREDITORS BANKERS INVESTORS GOVERNMENT TRADE ASSOCIATIONS STOCK EXCHANGES RESEARCHERS ECONOMISTS EMPLOYEES GENERAL PUBLIC

FINANCIAL STATEMENTS ANALYSIS

MEANING: the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationship between the items of the Balance sheet and the Profit and loss account

MEANING OF FINANCIAL ANALYSIS

The simplification of financial data by methodical classification of the data given in the financial statements.

MEANING OF FINANCIAL INTERPRETATION

Explaining the meaning and significance of the data so simplified.

TYPES OF FINANCIAL ANALYSIS

1) on the basis of material used a)External analysis b) Internal analysis 2) On the basis of modus operandi/operation a) Horizontal analysis b) Vertical analysis

METHODS OR DEVICES OF FINANCIAL ANALYSIS

1) 2) 3) 4) 5) 6) 7) COMPARATIVE STATEMENTS COMMON-SIZE STATEMENTS TREND ANALYSIS FUNDS FLOW ANALYSIS CASH FLOW ANALYSIS RATIO ANALYSIS COST-VOLUME-PROFIT ANALYSIS