Now I am going to explain the financial reports
of a business concern. Well it is the end products of business transactions. It primarily comprises the position statement or balance sheet and income statement or profit and loss account.. These statements or reports are the result of a business concern at the end of the period normally the financial year.These reports are the sources of information on the basis of which conclusions are drawn about the profitability and the financial position of the business concern. Management and the outsiders like investors, creditors, customers, suppliers, financial institutions, employees, potential investors, government and general public who have interests in the affairs of the business take decisions on the basis of these reports.
Objectives of financial reports
:
of a business concern. Well it is the end products of business transactions. It primarily comprises the position statement or balance sheet and income statement or profit and loss account.. These statements or reports are the result of a business concern at the end of the period normally the financial year.These reports are the sources of information on the basis of which conclusions are drawn about the profitability and the financial position of the business concern. Management and the outsiders like investors, creditors, customers, suppliers, financial institutions, employees, potential investors, government and general public who have interests in the affairs of the business take decisions on the basis of these reports.Objectives of financial reports
:As you know the financial reports show the profitability and the financial position of a business concern, so the primary objective of financial reports is to assist in decision making.
It provides reliable information about the assets and liabilities of a business firm.
It provides other useful information about changes in assets and liabilities.
It provides information that helps in earning potential of the business.
Let's discuss about the anatomy of financial reports
I have said before that financial reports comprises two basic statements i) Balance Sheet or the position statement and ii) Profit and Loss account. However it may also include two other statements iii) A report of changes in owners' account or Retained Earnings and iv) A report of changes in financial position.
Look at the chart below to have a better understanding
Let me briefly discuss the meaning and significance of each of these statements
Balance Sheet : This report shows the resources (assets) the business has and the sources of these resources (liabilities). Liabilities are the investments by owners and outsiders. The Balance Sheet depicts the financial position of the concern. It is prepared in a particular date. However there is not a particular sequence of showing various assets and liabilities.
Profit and Loss Account or Income Statement : This report is prepared to ascertain the profit or loss made by a business firm at the end of the period. This report shows the revenues earned and the expenses incurred for earning that revenues. Excess of revenues over expenses is the profit and the reverse is the loss of the business concern.
Income statement may be prepared in the form of a Manufacturing Account to find out the cost of production, in form of Trading Account to ascertain the gross profit or loss , in the form of a Profit & Loss Account to determine the net profit or loss.
Retained Earnings or changes in owners' equity : Owners' equity has two elements i) paid-up share capital or the initial amount invested by the share holders and ii) retained earnings/reserves and surplus representing undistributed profits. The report of changes in owners' equity shows the beginning balance of owners' equity account, the reason of increase or decrease and its ending balance. The report of changes in owners' equity is the report of retained earning. This report is also called as profit and loss appropriation account.
Report of changes in financial position : The balance sheet gives a static view of assets and liabilities of a business concern at a certain point of time. So another report called report of changes in financial position is prepared to show the changes in assets and liabilities from end of one period to end of another point of time. This report shows the movement of funds or working capital during a particular period. The report of changes in financial position takes any of the two forms:
The word 'fund' means the working capital of the business concern. Funds flow report is prepared to analyze the changes in the financial condition of a business firm between two periods. This report helps the management to know the sources of funds and their applications. It provides information to the management in policy formulation and performance appraisal.
This statement shows the financial position of a business concern on cash basis. It says the causes of changes in cash position of a business concern between dates of two balance sheets. This statement focuses on changes of cash only. In brief you can say that cash flow report describes the sources of cash and its uses. I will discuss these two reports in detail in my next posts.
Here I am going to discuss more about the Balance Sheet. Well I have said before that Balance Sheet shows the details of assets and liabilities of a business concern. This report can be prepared in horizontal and vertical form. Normally it is prepared in horizontal form. Assets are shown in the right side and liabilities in the left side. This may be shown in reverse order in some regions of the globe.
The assets and liabilities are shown either on liquidity basis or on permanency basis. If it is shown on liquidity basis then more liquid assets like cash and bank etc are shown first and least liquid assets will be shown at last. In liabilities side liabilities to be redeemed in short period are shown first and the long term liabilities are shown last.
When Balance Sheet is prepared on permanency basis, in assets side fixed assets are shown first and liquid assets are shown last. On the liabilities side the long term liabilities are shown first and the short term in last.
The assets and liabilities are shown either on liquidity basis or on permanency basis. If it is shown on liquidity basis then more liquid assets like cash and bank etc are shown first and least liquid assets will be shown at last. In liabilities side liabilities to be redeemed in short period are shown first and the long term liabilities are shown last.
When Balance Sheet is prepared on permanency basis, in assets side fixed assets are shown first and liquid assets are shown last. On the liabilities side the long term liabilities are shown first and the short term in last.
Look at the specimen of a Balance Sheet below. Here assets and liabilities haven been shown on permanency basis
In the next post I will discuss about the types and different methods of financial analysis.
Horizontal form of Balance Sheet
Liabilities | Amount | Assets | Amount |
Share Capital Equity Share Capital Preference Share Capital Reserves And Surplus Capital Reserve Share Premium Other Reserves Profit And Loss Account Secured Loans Debentures Long term loan from Banks Unsecured Loans Current Liabilities Advance From Customers Unpaid Dividends Sundry Creditors Outstanding Expenses Provisions Provision for doubtful debts Provision for insurances, pension and other benefits | Fixed Assets Land Building Plant & Machinery Furniture & Fittings Vehicles Goodwill Patents Copy Right Investments Government Securities Shares, Debentures and Bonds Current Assets Closing Stocks Loans and Advances Sundry Debtors Bills Receivables Preliminary Expenses Cash Bank |
Vertical Form Of Balance Sheet
Amount | |
Sources Of Funds Capital Reserves and Surplus Loans Secured Loans Unsecured Loans Total : Application Of Funds Fixed Assets Investments Net Current Assets Profit and Loss Account (debit) |
In the next post I will discuss about the types and different methods of financial analysis.
