Tag: introduction of financial statement of company

The financial statements show the financial position of an organisation, thereby telling if the policies, procedures and methods used by the management were useful or not. They show the gap between the actual performance by the management and the owner's expectation.  

The financial statements of a company show the financial position of an organisation and helps in comparison with the past results. The financial statements helps the credit lending institutions to understand the liquidity, solvency of the company and thereby helping them with the decision to whether grant credit or not. The steward is a person who manages the resources and financial statements helps to understand if resource utilisation was useful or not. The investors of the company want to know whether the company will be profitable or not. 

Financial statements have a lot of limitations one being that the financial statements show the assets at the historical cost and not the current market price. They do not record the fluctuations in the price, there by the profit or loss from the same is not taken into account. 

Financial statements are very important for a business but it has many limitations being personal bias, assets may not realise, vital or qualitative information missing. The financial statements may be affected by personal bias as the person making the statements is a human being. Financial statements do not show detailed information about every transaction and they also do not record the qualitative information. The statements only record quantitative information.

Investors are the owners of the company. Financial statements help them to assess the long term solvency of the business in which they have invested. They asses whether they will get fair returns or not for the money they have invested in the business.  

The financial statements help the investors to calculate market price of the shares. Market price of shares is determined by the net income of the company for equity share holder. This income is basically after deducting all interest, tax, dividend of preference shareholders etc,. divided by the number of equity shares. 

Two primary qualitative characteristics are: - 1. relevance and reliability. 
Secondary qualitative characteristics are:- 1. Understandability 2. Verifiability 3. Timeliness 4. Comparability. 
Relevance refers to how useful the information is for financial decision making processes. 
Reliability refers to the extent to which information accurately reflects company's resources. 
Relevance and reliability are primary characteristics because if information is not helpful for decision making or not providing accurate information then understandability , timeliness of information is of no use.  

Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which show the financial position of business concern in an organised manner.

Some of limitations of financial statements are as follows

Accounting information is sometimes based on estimates which may be unrealistic.

Window dressing may lead to faulty results. Window dressing means manipulation of accounts and Show easy picture of financial statements

Accounting ignores the effect of price level changes. Transactions recorded on historical cost. Examples, fixed assets recorded at historical cost.

Accounting information can be manipulated and thus cannot be considered as the true test of performance.

Accounting information may be Biased accounting information is not without personal influences or bias of accountant.

The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users who need it in different decision situations. There are two main user group viz. internal users, mainly management, who needs timely information on cost of sales, profitability, etc. for plaining, controlling and decision making and external users who have limited authority, ability and resources to obtain the necessary information and have to rely on financial statements (Balance sheet, profit and loss account)

As per “Generally Accepted Accounting Principles (GAAP)” one of the important rule is to record all transactions on the basis of historical cost, which is verifiable from the documents such as cash receipt for the money paid. This brings in objectivity in the process of recording and makes the accounting statements more acceptable to various users.