In: Accounting
FINANCIAL STATEMENTS AND ITS TYPES
Financial Statements represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance and liquidity of a company. Financial Statements reflect the financial effects of business transactions and events on the entity
Types of financial statements
1. Income statement
2. Balance sheet
3. Cash flow statement
4. Fund flow statement
A.Income statement
Income statement is prepared to ascertain the profit/loss of a business during a period of time. Generally in big organisations only one account known as profit and loss account is prepared.Gross profit, net profit and operating profit are ascertaind in this account.
KEY TAKEAWAYS
1.Trading account
The profit arising out of trading alone is called gross profit and if there is loss it is called gross loss . it is prepared for the purpose of ascertain gross profit or loss. A trading account is used to buy or sell equity shares in a stock market. Previously, the stock exchange functioned on the open outcry system. In this, the traders used hand signals and verbal communication to convey their buying/selling decisions. Soon after the stock markets adopted the electronic system, trading accounts replaced the open outcry system. In the online method, the buyers and sellers don’t have to be physically present at the stock exchange to place orders. Instead they open a trading account with a registered stock market broker; who conducts trading on their behalf. Each trading account has a unique trading ID which is utilised to perform online transactions.
Gross profit = net sale - cost of goods sold
Net sales = total sales - sales returns
Cost of goods sold = opening stock+ net purchases+ direct expenses-closing stock
2.profit and loss account
Profit and loss account is prepared for ascertain net profit or loss.profit and loss account bigin with gross profit/gross loss brought down from the trading account.in this account all expenses debited and all incomes credited.
KEY TAKEAWAYS
1.The P&L statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.
2.The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.
3.It is important to compare P&L statements from different accounting periods, as the changes in revenues, operating costs, R&D spending, and net earnings over time are more meaningful than the numbers themselves.
4.Together with the balance sheet and cash flow statement, the P&L statement provides an in-depth look at a company's financial performance.
B.Balance sheet
A blancesheet is a statement of assets and liabilities of a business prepared with a view to ascertain the financial position of the business as on a particular date.it is prepared for the end of the accounting period immediately after the preparation of trading and profit and loss account.it shows the financial position of the business.
The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity.
There are 2 sides in balance sheet
Asset side and liability side.asset side shows that all assets and liability side shows all liabilities and capital.
Assets
Assets are things that the company owns. They are the resources of the company that have been acquired through transactions, and have future economic value that can be measured and expressed in dollars. Assets also include costs paid in advance that have not yet expired, such as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent. (For a discussion of prepaid expenses go to Explanation of Adjusting Entries.)
Examples of asset accounts that are reported on a company's balance sheet include:
1. Cash
2. Petty Cash
3. Temporary Investments
4. Accounts Receivable
5. Inventory
6. Supplies
7. Prepaid Insurance
8. Land
9. Land Improvements
10. Buildings
11. Equipment
12. Goodwill
Usually asset accounts will have debit balances.
Contra assets are asset accounts with credit balances. (A credit balance in an asset account is contrary—or contra—to an asset account's usual debit balance.) Examples of contra asset accounts include:
1.Allowance for Doubtful Accounts
2.Accumulated Depreciation-Land Improvements
3.Accumulated Depreciation-Buildings
4.Accumulated Depreciation-Equipment
5.Accumulated Depletion
Etc.
Classifications Of Assets On The Balance Sheet
Accountants usually prepare classified balance sheets. "Classified" means that the balance sheet accounts are presented in distinct groupings, categories, or classifications. The asset classifications and their order of appearance on the balance sheet are:
1. Current Assets
2. Investments
3. Property, Plant, and Equipment
4. Intangible Assets
Liabilities
Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word "payable" in their account title. Along with owner's equity, liabilities can be thought of as a source of the company's assets. They can also be thought of as a claim against a company's assets.
Liabilities also include amounts received in advance for future services. Since the amount received (recorded as the asset Cash) has not yet been earned, the company defers the reporting of revenues and instead reports a liability such as Unearned Revenues or Customer Deposits. (For a further discussion on deferred revenues/prepayments see the Explanation of Adjusting Entries.)
Examples of liability accounts reported on a company's balance sheet include:
Notes Payable
Accounts Payable
Salaries Payable
Wages Payable
Interest Payable
Other Accrued Expenses Payable
Income Taxes Payable
Customer Deposits
Warranty Liability
Lawsuits Payable
Unearned Revenues
Bonds Payable
Liability accounts will normally have credit balances.
Contra liabilities are liability accounts with debit balances. (A debit balance in a liability account is contrary—or contra—to a liability account's usual credit balance.) Examples of contra liability accounts include:
Discount on Notes Payable
Discount on Bonds Payable
Debt Issue Costs
Bond Issue Costs
Classifications Of Liabilities On The Balance Sheet
Liability and contra liability accounts are usually classified (put into distinct groupings, categories, or classifications) on the balance sheet. The liability classifications and their order of appearance on the balance sheet are:
Current Liabilities
Long Term Liabilities
C.cash flow statement
A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.
Cash flow statement is classified into 3 catogories
1.cash flow from operating activities
Cash Flows From Operations
This is the first section of the cash flow statement covers cash flows from operating activities and includes transactions from all operational business activities. The cash flows from operations section begins with net income, then reconciles all noncash items to cash items involving operational activities. So, in other words, it is the company's net income, but in a cash version.
This section reports cash flows and outflows that stem directly from a company's main business activities. These activities may include buying and selling inventory and supplies, along with paying its employees their salaries. Any other forms of in and outflows such as investments, debts, and dividends are not included.
Companies are able to generate sufficient positive cash flow for operational growth. If there is not enough generated, they may need to secure financing for external growth in order to expand.
2.cash flow from investing activities
This is the second section of the cash flow statement looks at cash flows from investing and is the result of investment gains and losses. This section also includes cash spent on property, plant, and equipment. This section is where analysts look to find changes in capital expenditures
When capital expenditures increases, it generally means there is a reduction in cash flow. But that's not always a bad thing, as it may indicate that a company is making investment into its future operations. Companies with high capital expenditures tend to be those that are growing.
While positive cash flows within this section can be considered good, investors would prefer companies that generate cash flow from business operations not through investing and financing activities. Companies can generate cash flow within this section by selling equipment or property.
3. cash flow from financing activities
Cash flows from financing is the last section of the cash flow statement. The section provides an overview of cash used in business financing. It measures cash flow between a company and its owners and its creditors, and its source is normally from debt or equity. These figures are generally reported annually on a company's 10-K report to shareholders .
Analysts use the cash flows from financing section to determine how much money the company has paid out via dividends or share buybacks. It is also useful to help determine how a company raises cash for operational growth
D. Fund flow statement
Fund flow statement also reffered to as statement of “sources and application of funds” present the movement of funds and helps to understand the changes in the structure of assets, liabilities and equitiy capital.
Fund means working capital.if current assets of company is more than current liability of business,it is called working capital and working capitals other name is fund.
Fund = working capital = current asset-current liability
Flow of fund include both inflow and outflow.the term flow of fund means Transfer of economic values from one assets to another and one liability to another.
Inflow of funds
1. Issue of equty share capital
2. Issue of preference share capital
3. Issue of debentures/long term loans
4. Premium on issue of shares and debentures
5. Sale of investing
6. Sale of fixed assets
Outflow of funds
1. Redemption of preference share capital
2. Redemption of debentures
3. Repayment of long term loans
4. Premium on redemption of preference shares and debentures
5. Purchase of investment/ fixed assets
6. Dividend paid
7. Taxes paid
8. Drawings by proprietor/partner
A Funds Flow Statement is a financial document that analyses a company’s Balance Sheet of two years to validate the movement of funds from the previous financial year to the current year. In other words, it compares the source of inflow and outflow of funds during the concerned accounting period and analyses how it affects the working capital of an organization.
It is an essential determiner that shows how funds are used. With the help of this statement, financial analysts can assess the fund flow of an organization in the near future.
As this statement portrays the movement of funds among several sources and their applications, it is also known as the Application of the Funds and Statement of Sources.
Usually, the preparation of these statements is followed by a funds flow analysis. It serves as a financial parameter that helps a company to control its finance and develop a better strategy to utilize funds.