Question

Compare and contrast the roles of the four external financial reports (statement of financial performance, statement of financial position, statement of changes in equity and statement of cash flows)

Answer 1

Statement of financial performance:

A statement of financial performance is an income statement prepared in line with accrual concept of accounting. As per accrual concept all revenues and expenses which are earned and incurred are accounted in income statement irrespective of when cash is received and cash is paid respectively. An income statement summarises the net income of the firm during a given period. It consists of sales revenue and other revenue and costs incurred in providing the revenue. It considers the operating expenses incurred in earning the revenue. The other income and expenses and other revenues and gains are considered in income statement. For example: profit or loss on sale of fixed assets, trading securities gain and losses, etc. An income statement helps in profitablity evaluation of the firm

Statement of financial position:

A statement of financial position summarises the firm’s assets, liabilities and equity as on a given date. The firms’ assets are the operating assets that are current assets generated out of business and long term assets held for generation of revenue and long term investments .The liabilities consists of current and long term liabilities. The equity is the shareholders contribution and retained earnings due to accumulation of net income over a period of time. A Balance sheet helps in understanding the net worth of the firm. It helps in understanding the working capital, liquidity and solvency of the firm.

Statement of change in equity:

This statement gives the changes in equity during the year. It gives details of additional common stock issued, purchase of treasury stocks, and changes in other comprehensive income, payment of dividend to shareholders, etc. An income statement output is input for statement of changes in equity and output of statement of change in equity is input for balance sheet.

Statement of cash flows:

A statement of cash flows helps in understanding cash movements during the year. The income statement does not give the cash movement because it is prepared on accrual basis and hence cash flow statement has gained importance to understand the cash flow movement during the year. It helps in evaluation of a firm’s position on cash and understand cash flows from operating, investing and financing activities.