Question

(10) Financial Statements

Give a basic explanation what each of the financial statements does and why it is important. Then pick one statement to go into detail about and share why you picked that statement.

Answer 1

There are three most important Financial statements prepared globally which helps to understand the financial situation of any organization. These are - Statement of Profit and Loss or P&L Statement;Balance Sheet and Cash flow statement.

Broadly,

P&L statement shows the  Profitability of the organization. It Summarizes the revenues, costs and expenses incurred during a specific period of time Accrual concept is generally followed to record financial transactions pertaining to specific period.

Balance sheet: This statement shows the Solvency position of the organization. It presents what you own (assets), what you owe (liabilities) as at a given date. Assets are applicatioon of funds and Liabilities are sources of funds.

Cash Flow Statement: This statement shows the Liquidity position of the organization. Cash inflows and outflows over a specified time period- reveals how a company spends its money (cash outflows) and where that money comes from (cash inflows). It is considered as one of the most important financial statement as we say " Cash is King".

Hence would like to explain Cash Flow statement in detail because it shows the financial health of the company in more transparent way.

1.Cash & cash equivalent: This includes cash in hand ,cash at bank, short term advances, short term deposits, short term investments, which will mature within 3 months from the date of their acquisition.

2.Items of cash flow statements are classified under the following 3 activities:

            a)Operating Activities

            b)Investing Activities

            C)Financing Activities

4.Operating items are items related to principal revenue producing activities and all those items which are not investing or financing item.

5.Investing items are items related to acquisition and disposal of Fixed assets and other investments.

6. Financing items are items which changes the capital structure including pref. shares and borrowings.

7.Sometimes a single payment may include more than one activity, we have to do the segregation work.

8. Sometimes, capital structure and asset structure may change in a big way but cash inflow and cash outflow doesnot arise. Example, bonus,conversion of debt into equity,demerger, amalgamation, shares issued for business acquisition.

I hope the write up is easy to understand. Thank you!