After the trial balance is prepared, the business owner can prepare the financial statements. List and...

After the trial balance is prepared, the business owner can prepare the financial statements. List and discuss the purpose of each financial statement, the order in which the financial statements are prepared, and the information included in each financial statement (information in the back of Chapter 3).

In addition, consider the fact that many people feel that financial statemets should be expanded beyond the traditional components (income statement, statement of owner's equity, statement of cash flows and balance sheet). Should finanical statements be expanded to include a company's ecological and social performance?

Expert Solution

The following 4 statements are the basic financial statements prepared after trial balance is completed

1. Income Statement -

Income statement presents information on financial results over a perod of time.
It communicates revenue and other income generated and expenses incurred during the period.
Net Income = Revenue + Other Income - Expenses
Basic & Diluted EPS is presented on the face of the Income statement.

2. Balance sheet

It is also called statement of Financial Position
It presents company's current financial position by disclosing resources (assets) and obligations (liabilities)
Owner's Equity = Assets - Liabilities
Balance sheet is presented as on date.

3. Statement of Changes in Equity

This statement reports changes in owner's investment
Basic Components include Equity Share Capital or Paid up Share Capital, Retained Earnings and Non controlling minority interests & reserves.
It shows the beginning balance, any increase or decrease during the period and closing balance.

4. Cash Flow Statement

Cash Flow statement shows the financial flexibility of the company
Cashflow is divided in 3 categories a. Operating b. Investing and c. Financing
Operating activities include day to operational activties.
Investing activites are associated with acquistion and disposl on assets
Financing Activities are associated with activities related to obtaining or repaying capital used for the business
There are 2 methods - Direct and Indirect Method of preparing cashflows

In addition to above, Financial statements include Notes to Accounts and Supplementary schedules

They are also known as foot notes
They provide information essential for understanding the data in the primary statements
They provide basis for preparation of financial statements, accounting policies, methods & estimates used.
It allows users to improve their assessment of the amount, timing & uncertainity of the estimates reported.
Provides additional information like business acquistions or disposals, legal actions, employee benefit plans, contingenicies & commitments, significan customers, sales to related parties and segments of the firm.

In today's changing world, it is necessary that the financial statements should just not provide finanacial data. The companies should disclose its ecological and social performance. This is necessary not onlly to keep the companies ecologiclly and socially responsible it also gives a non-financial view of the company to the readers of financial statements. There are certain non monetary factors necessary to determine whether the company is doing good work ecologically and socially. These reports ensure that the company is not exploiting ecological and social factors to maximise financial gains. Hence reporting of ecological and social performance of the company is also essential.

ekkarill92 answered 2 years ago

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