Question

DB 1 - Companies prepare four primary financial statements. What are those financial statements, and what information is typically conveyed by each 

DB 2 - Explain how a company's four primary financial statements are linked 

DB 3- Financial statements are used by several interested stakeholders. List three or more potential external users of financial statements. Explain how each constituent on your list might use financial statement information in their decision-making process. 

DB4-What are the components of a SWOT analysis? For each component, indicate whether it is an internal or external environmental factor.

Answer 1

DB 1 Financial statements

Financial statements

These are statements prepared at the end of financial year to provide useful information about an entity’s financial performance and financial position to a wide range of users for:

ü Making economic decision

ü Assessing the STEWARDSHIP of the management.

(Stewardship:- The accountability of management for the resources entrusted to it by the owners of an entity.)

Following are the financial statements:

1. Income statement (Statement of comprehensive income, Profit & Loss account)

2. Statement of changes in equity

3. Statement of financial position (Balance sheet)

4. Statement of Cash flows

Income statement (Statement of comprehensive income, Profit & Loss account)

            Income statement is prepared to show the financial performance of a company, ie. the profit or loss. It records all revenue incomes and expenses. Any expenses incurred for the day to day running and for the maintenance of fixed assets are called revenue expenses. All income received from the ordinary course of business is called revenue income. If the total of revenue exceeds the total of expenses, it will result in profit. On the other hand if the total of expenses are greater than revenue, then it will be a loss. It is prepared on accrual basis, i.e all expenses incurred and income earned must be included in the profit and loss account irrespective whether the amount is paid or received.

Statement of changes in equity

            This statement is prepared to show the changes happened during the year to equity. Equity means owners claim in the business. Equity includes share capital, capital reserves, revenue reserves and surpluses. Capital reserves are the reserves created as per the Company’s Act and it is a must. Revenue reserves are created as per the discretion of the board of directors, ie. these are only optional. This statement is used to show what happened to the equity during the year. This statement will start with the opening balances of each and every items included in total equity and will show all increases and decreases for each item.

  

Statement of financial position (Balance sheet)

            This statement is prepared to show the financial position of a business, ie. the position of assets, liabilities and capital. Assets are resources owned by the company and liabilities are the amount payable to outsiders. Capital is the amount owing its owners which will include the owner’s contribution and reserves and surpluses. It depicts the accounting equation in a statement format. All capital expenditure and capital receipts are recorded in the balance sheet.

Statement of Cash flows

            A statement of cash flows summarises all movements of cash into and out of a business during the accounting period. It is used to measure the financial adaptability of a business.

Cash Flow Statement is a statement showing the change in cash position from one period to another. It summarizes the reasons for increase or decrease in the amount of cash between two balance sheet dates or it explains the reasons for inflow or outflow of cash. A cash flow statement is the link between two successive balance sheets.

DB 2

Income statement is prepared to show the financial performance and Balance sheet is used to show the financial position. Statement of changes in equity paves a bridge between income statement and balance sheet. It explains the changes happened to the equity between two balance sheet dates. And the statement of cash flows is used to explain the changes happened to cash and cash equivalents during the year. For making economic decisions users may need information regarding financial performance, financial position and liquidity and solvency of a business.

DB 3

The main purpose of financial accounting is to provide information to various users for making economic decisions. Some of its users are:

1. Owners and prospective investors:- They are very much interested to know the financial performance and how efficiently the management uses the available resources to increase their wealth. They want to now both revenue income and capital appreciation.

2. Managers :- Another internal user who will use this information to take decision is managers. To take informed decisions they need various information regarding the performance and liquidity and solvency.

3. Creditors and lenders:- Both creditors and lenders take decisions to grand credit by assessing the financial strength, liquidity position, financial adaptability and future earning capacity of the business. One of the important externa user who will use these financial information is creditors and lenders.

4. Government :- Government and tax authorities used to fix the amount of tax based on the financial performance.

DB 4

SWOT is a technique used by an organization to identify its Strength, Weakness, Opportunities and Threat related to a project.

Strength

The first letter in SWOT stands for strength. The first step in SWOT analysis is to list out our strength which are internal such as:

ü Special qualities that we possess

ü Internal resources such as skilled employees or technical know how

ü Tangible assets, intellectual property right etc,

Wekness

Next step is to critically evaluate our internal weaknesses

ü These are the things our company lacks

ü Things our competitors do better than us

Opportunities

These are external to our business and cannot be controlled by us:

ü Under served market

ü Emerging need for a specific product

ü Less competitors

ü Some difficulties which are faced by all

Threat

These are another external factor which posses risk for the existence or growth of our company

ü Emerging competitors

ü Changing regulatory environment etc.