Question

what is involved in the financial statements of an organisation’s intentions.

Answer 1

The general purpose of the financial statements is to provide information about the results of operations, financial position, and cash flows of an organization. The information given in the financial statements is used by the various users of the statements like shareholders, creditors, government authorities for tax purposes, stakeholders, banks for loan etc. A financial statement of a company involves preparation of the following items for providing insightful information to the users, namely:

1. Income Statement - Income statement of the company provide information regarding the results of the operations of an entity i.e sales revenue, cost of goods sold, other expenses, taxation etc. Income statement tells the users how much profit the entity has generated in the current year out of the sales after incurring all the related expenses. This statement also serves the purpose of levying taxation by government authorities on the basis of profit generated in the current year.

2. Balance sheet - Balance sheet is used to provide the net financial position of the entity as at the end of the year. Balance sheet includes the year end balances regarding various stakeholders in the company like loan repayment pending, amount due to creditors, amount to be received from debtors, shareholder's equity etc.

3. Statement of changes in equity - Equity statement provides the information regarding the changes in the amount due to shareholders i.e how much money in business is contributed to the owner's of the business. This includes equity share capital contributed by shareholders, profit earned during the year allocated to them, any dividends paid to the shareholders, any amount of buy back of shares etc. The net amount of statement of changes in equity is shown in the balance sheet on liability side as equity amount.

4. Cash Flow Statement - Financial statements are prepared on accrual basis and therefore, it does not reflect only the pure cash income and expenses. For knowing the cash inflows and outflows at individual item level cash flow statement is prepared by the organization. This statement shows the all the items of inflows and outflows during the year and reconcile the year end cash & Bank balances with inflows & outflows.