1. Meaning of Financial Statements
Every business concern wants to know the various financial aspects for effective decision making. The preparation of financial statement is required in order to achieve the objectives of the firm as a whole. The term financial statement refers to an organized collection of data on the basis of accounting principles and conventions to disclose its financial information.
A complete set of financial statements includes: [IAS 1.10]
• a statement of financial position (balance sheet) at the end of the period
• a statement of profit or loss and other comprehensive income for the period (presented as a single statement, or by presenting the profit or loss section in a separate statement of profit or loss, immediately followed by a statement presenting comprehensive income beginning with profit or loss)
• a statement of changes in equity for the period
• a statement of cash flows for the period
• notes, comprising a summary of significant accounting policies and other explanatory notes
• comparative information prescribed by the standard.
2. Sources of Financial Information
i. Income Statement: The term 'Income Statements' is also known as Trading, Profit and Loss Account. This is the first stage of preparation of final accounts in accounting cycle. The purpose of preparing Trading, Profit and Loss Accounts to ascertain the Net Profit or Net Loss of a business concern during the accounting period.
ii. Balance Sheet: Balance Sheet may be defined as "a statement of financial position of any economic unit disclosing as at a given moment of time its assets, at cost, depreciated cost, or other indicated value, its liabilities and its ownership equities." In other words, it is a statement which indicates the financial position or soundness of a business concern at a specific period of time. Balance Sheet may also be described as a statement of source and application of funds because it represents the source where the funds for the business were obtained and how the funds were utilized in the business.
iii. Statement of Retained Earnings: This statement is considered to be as the connecting link between the Profit and Loss Account and Balance Sheet. The accumulated excess of earning over losses and dividend is treated as Retained Earnings. The balance of retained earnings shown on the Profit and Loss Accounts and it is transferred to liability side of the balance sheet.
iv. Statement of Changes in Financial Position: Income Statements and Balance sheet do not disclose the operational efficiency of the concern. In order to measure the operational efficiency of the concern it is essential to identify the movement of working capital or cash inflow or cash outflow of the business concern during the particular period. To highlight the changes of financial position of a particular firm, the statement is prepared may emphasize of the following aspects:
o Fund Flow Statement is prepared to know the changes in the firm's working capital.
o Cash Flow Statement is prepared to understand the changes in the firm's cash position.
o Statement of Changes in Financial Position is used for the changes in the firm's total financial position.