Essentials of Good Financial Statements
A proper analysis and interpretation of financial statements enables the interested parties to judge the profitability and financial strength of the business. Hence, the financial statements should have some characteristics which are essential to be good financial statements. They are briefly explained below.
1. Easy to Prepare: The contents of the financial statements should be easily and readily available from the books of accounts of the business concern. If so, the calculation is very easy and irrelevant information cannot be recorded in the financial statements. Moreover, the size of the form of financial statements should not be abnormally too large.
2. Depict True Financial Position: The information contained in financial statements should be clear and correct so that true financial position should be disclosed in the financial statements. Moreover, all the material information should be included in the financial statements.
3. Understand by Common Man: A common man or layman does not know the accounting rules, principles and conventions. These are necessary to understand the contents of financial statements. But, the financial statements should be prepared in simple and common language and non-technical in order to understand the financial statements without any specialized training or education.
4. Effective Presentation: The utility of the financial statements is enhanced only through effective presentation. A simple format is used so as to understand the statements without much difficulty.
5. Easy Comparison: The columns and amounts should be arranged in such a way that the figures of current year is easily compared with previous year. Likewise, the comparison of actual results with budgeted ones or with standards should also be made possible. Moreover, the format of similar company is followed so that inter firm comparison is made possible.
6. Relevance: The prepared financial statements should achieve the objectives of the business concern. This is possible if relevant information alone included in the financial statements.
7. Attractive: The financial statements should be prepared in such a way that important information is underlined so that it attracts every interested parties of the financial statements.
8. Focus on Significant Items: Every reader of the financial statements wants to identify the significant items. Hence, it is necessary that such facts or items should be written in bold figures and letters or in different ink.
9. Analytical Representation: The contents of the financial statements can be analyzed in different directions so that new facts of the accounting data can be highlighted. A relationship can be established in similar type of information. Moreover, logical interpretation can be carried out for analytical presentation of financial statements.
10. Brief: There is no need of detailed information in financial statements. Only brief information is enough. The reason is that detailed information leads to difficulty to judge the financial position and performance of the business concern.
11. Easy Calculation of Accounting Ratios: The financial statements should be presented in such a way that required items and figures are easily obtained for calculating various accounting ratios. These ratios are used by the interested parties for proper analysis and interpretation.
12. Promptness: The financial statements should be prepared and presented as early as possible. In nutshell, the statements should be ready soon after completion of the accounting year.