Question

In: Accounting

Write an essay on why the four financial statements (statement of comprehensive income, financial position, changes...

Write an essay on why the four financial statements (statement of comprehensive income, financial position, changes in equity and cash flows) important to shareholders?

Solutions

Expert Solution

Importance of Financial statements for shareholders is quite evident. 4 fiancial statements or 4 components of financial statements convey different kinds of information which shareholders can use for their decisions regarding their investments in the entity. As we discuss below :

(a) Statement of comprehensive income : Comprehensive income includes result of all income and expenses.It provides insight into gains or losses which a company or enity has aquired or incurred over a period of time ( say reporting peirod) due to its main or core operations as well as from non-core operations. A company engaged in retailing goods may have some income from investments also. In this case the results of retail business is core operations while the income from investments would be non-core or other operating income.

Apart from above it includes , other comprehensive income statement i.e. those items on which income or expense has not be yet realised for example foreign exchnage gains or losses at period end.

Shares holders get to know from this informationn, whether an entity is profitable or not. Whether company's gains are from its main operations or ancilliary activities, what percentage of gains are actually realised. The profitability and earning analysis is possible only from the information provided by this statement.

(b) Statement of financial position :

It is statement of all assets and liabilities, also known as Balance Sheet. The shareholders get to know from this :

- The company is solvent or not

- Working Capital position of the company ( Current Assets and Current liability)

- Whether company has sufficient capital

- Whether debt is more or equity is more

- Which asset is more prominent

- Duration of assets and liabilities.

(c) Shatement of changes in equity :

It is known as statement of retained earnings also. It helps the shareholders know :

- Changes in reserves due to current year profit or loss

-Changes in share capital due to issue or redemption of shares, further premium discuount thereon

- Impact of changes in accounting policies

- Other gains or losses.

(d) Statement of Cash flow :

A company may be profitable but still lacking cash. Or it may be generating a lot of cash but still unprofitable. It is important that operations of a company generate sufficient cash to cover its investment and financing obligations.Whether a company is able to provide dividend to shareholder also depends upon cash generation.It becomes imperative that cash flows should be analysed. This is made possible through Cash Flow Statement. It helps a shareholder decide whether a company will last longer and will pay him back sufficiently.


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