Table of Contents
Meaning of Financial Statements
Financial statements means the statements prepared for the purpose of presenting a periodical review or report on the progress of business by the management. The statements contain the information relating to finance, hence, these statements are called as financial statements. Other name of financial statements is financial reports.
Definition of Financial Statements
“Financial Statements are organized summaries of detailed information and are thus a form of analysis. The type of statements accountants prepare, the way they arrange items on these statements and their standards of disclosure are all influenced by a desire to provide information in a convenient form”.
Nature of Financial Statements
Generally, financial statements are prepared in order to disclose the financial position of business concerns at a point of time and also operating results during the period under review. The interested parties of the financial statements are thinking that the values shown in the financial statements to be real and absolute. But, this is not correct understanding.
The values shown in the financial statements never convey the current or economic values. The data shown in the financial statements are greatly affected by the following facts.
1. Recorded Facts
All the business transactions which are having financial character alone recorded in the books of accounts (Journals, Ledger and other Subsidiary Books). Such recorded information are used for preparing financial statements. After some gradual passage of time, these recorded information become historical in nature. Besides, the financial statements>re showing results of the various transactions which are taken place at various dates.
There is no place for their current value in the financial statements which is neither justified nor logical. For example: If a plant and machinery is purchased in 2005 and another plant and machinery is purchased in 2010, then the total amount paid at both dates shall be shown under “Plant and Machinery Account” in the books.
The purchasing power of money in 2005 is not the same in 2010. Hence, the recording the value of plant and machinery in the books of account is not valid and correct. Besides, the assets are shown in the Balance Sheet either on Straight Line Method or Written Down Value Method. Market value or replacement cost is not shown in the financial statement.
2. Accounting Conventions
There are four types of accounting conventions. They are convention of conservatism, convention of full disclosure, convention of consistency and convention of materiality. These are used for valuation of raw materials, stock of finished goods, debtors and the like. Many companies does not follow same pattern of conventions throughout its life. Hence, the financial statements fail to satisfy the essential elements of comparison.
There are some postulates and assumptions just like accounting concepts and conventions. Such postulates and assumptions are used for preparing. financial statements. In other words, the conventions used in financial statements are based on certain postulates.
It is assumed that the purchasing power of money is constant for all the period. Hence, the management accountants are recording all the business transactions in rupee value on different dates without making any distinction between the rupee value of two dates.
4. Personal Judgement
Personal judgement plays a vital role in the preparation of financial records and financial statements. The management accountants may use their judgement in choosing the method of valuation of closing inventory, in calculating the provision for bad debts and in choosing the method of charging the depreciation of fixed assets.
Likewise, the application of various accounting concepts and conventions depends upon the personal judgement of the management accountant. Therefore, different meaning and results can be obtained from the financial statements of the same company. Based on the different results, different recommendations may be provided for the growth and development of a business concern.
Features of Financial Statements
The important features of financial statements are as follows.
1. Financial Statements are prepared at the end of the accounting period.
2. Financial Statements disclose both facts and opinions.
3. Financial statements are prepared on the going concern value..
4. Financial statements are recorded facts of financial transactions based on historical cost.
5. Financial statements are greatly affected by personal judgement of the accountants.
Objectives of Financial Statements
The different types of people are using the financial statements. They need different types of information. Hence, the main objective of financial statements is fulfilling the needs of such people. Even though, some other objectives are briefly explained below.
1. To provide an accurate and reliable financial information about the resources and usage in a business unit within the stipulated time.
2. To provide overall changes made in the financial information relating to resources and usage for a particular period.
3. To provide an accurate and reliable financial information relating to net changes made between resources and usage for a particular period arising out of business activities.
4. To provide financial information which are helping the top management for estimating earning potential of business.