Financial statements are the financial information presented in concise form and the financial information is the information relating to the financial position of the firm. Financial statements are prepared by the firm because of two main reasons:
1. To communicate with different parties about the financial position of the firm. These other parties include shareholders, creditors, banks, financial institutions, financial analysts, investors, etc.
2. To analyse the operations and performance of the firm for further planning.
Every firm, whether big or small, prepares the following financial statements:
1. Balance sheet
2. Income statement
Two other key financial statements which are usually prepared by corporate firms are:
1. Statement of Appropriation of Profit
2. Statement of Change in Financial position
1. Balance Sheet: The balance sheet is regarded as the most significant and the basic financial statement of the firm. It is prepared by the firm to present a summary of financial position at a given point of time, usually at the end of the financial year. It presents the assets of the firm, the liabilities of the firm and the contribution of the owners of the firm.
2. Income Statement: It is also known as Profit and Loss Account. It summarizes the revenues and the expenses of the firm for an accounting period. It gives a detail of sources of income and expenses and thus it provides the summary of the operating results of the firm for a specific period. The income statement shows the results of the operations of the firm during the period.
3. Statement of Appropriation of Profit: It is also called the Profit & Loss Appropriation account. As per the provision of the Companies Act 1956, it is not necessary to prepare this statement. Still most of the companies split the Income Statement into two parts i.e., the income statement and the P & L Appropriation Account. The net profit figure shown by the income statement is transferred to P & L Appropriation account wherein it is bifurcated into two main parts i.e., the dividend to the shareholders and the profits retained in the firm.
4. Statement of Change in Financial Position: For better understanding of the financial position of the firm, it is essential to know the movement of the funds/cash during the period. So for this purpose statement of change in financial position is prepared. This statement shows how the firm generated the funds during the period and how these funds were utilised. When this statement is prepared on the basis of working capital, it is called fund flow statement and when this statement is prepared on cash basis, it is called cash flow statement.