Question

What is the significance of Income Statement, Balance Sheet, Owner's Equity and Statement of Cash Flows, and what does each financial statement tell us about a business entity?

Answer 1

To have a best knowledge about the financial activities of any business entity ,then Financial statements are best source .Financial statements are the formal records of the financial statements of an entity .

These are the written and authenticated reports that quantifies the financial strength,liquidity and performance of any business enity .

They exhibit the finacial affects of business transactions and events on the entity

The four types of main financial statements whic every business entity prepares are as follows

1.Statement of Financial Position(also known as Balance sheet)

It provides the financial position of an entity at a given date.It comprises of three elements

A.Equity :what the business enity debts to its owners ,it presents the amount of capital that remains in the business aftet its assets are used to pay off its liabilities ,hence equity =Total assets - Liabilities

B.Liabilities :-it describes what business entity owes to third parties.Examples:creditors ,loans

etc

C Assets:It describes what a business entity controls and owns. Example:inventory ,plant and budings etc

2.Income statement (also known as profit and loss statement )

It describes the company's financial performance over a specified period (usually a year).It contains two components to describe

A.Income:It describes what business entity has earned over a period ( sales,revenue,dividend income etc

B.Expenses :It describes what costs business entity has spent over a period (salaries,depreciation,rebtal charges etc

3.Cash Flow Statements

It describes how a business entity's cash flows move over a period

It has classified into three activities

Operating Activities :which represents the cash movements from primary activities of a business enity

Investing Activities :which represents the cash flows from trading of assets other than Inventories(ex.purcahse of machinery

Financing Activities :Which represents cash flows generated or spent on raising and repayment of share capital and debts together with intrest and dividend

4.Statement of Changes in equity ( also known as statement of retained earnings)

It describes the movement of changes in statement of equity of a business entity from the following following components mainly

1.net profit or loss during the period as stated in the income statement

2.share capital issued or repaid during the period

3.effect of change in accounting policy or correction of accounting error

4.Dividend payments

5.Gains or losses recognised directly in equity (ex.revaluation surpluses)

This is the brief idea how financial statements describe about a business enity