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In: Accounting

Explain the purpose and use of the Statement of profit or loss, Statement of changes in...

Explain the purpose and use of the Statement of profit or loss, Statement of changes in equity, Statement of financial position (also known as the Balance Sheet) and of the Statement of cash flows. Explain why the Statement of cash flows differs from the Statement of profit or loss (125 words).

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Expert Solution

Financial statement consists of statement of profit and loss account, statement of affairs (balance sheet), statement of changes in equity, statement of cash flows and other notes to accounts. Financial statement are formal record of financial activities and position of the entity.

Individually, statement of Profit and loss is a period statement which shows profi or loss for the period of the entity. Statement of affairs (balance sheet) is a point statement which indicates the financial position of the entity at a particular point of time.

In statement of changes in equity, we can see the beginning and ending values of owner's equity and change due to profit and other retained earnings. Statement of cash flows presents movement of cash and cash equivalents, which are dividend into three parts at the end we can get the closing balance of cash and cash equivalents.

Cash flows statement follow cash basis of accounting where only cash receipts and cash payments were accounted. Where as Profit and loss follow mercantile (accrual) system of accounting where income and expenses were recorded irrspective of cash actually paid or received. This is how the statement of cash flows and statement of profit and loss are different.

ekkarill92 answered 2 years ago
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