Financial Statements Bcom Notes
Financial Statements Bcom Notes:- In this post, you will get the notes of B.com 3rd year Financial Management, by reading this post you can score well in the exam, hope that this post has helped you with this post to all your friends and all groups right now I must share it so that every student can read this post and it can also be helped in this post.
Meaning and Definition of Financial Statements
Financial statements are the end products of accounting process. They provide information about the profitability and the financial position of a business. These statements include at least two statements: 1. Income Statement or Statement of Profit & Loss, 2. Statement of Financial Position or Balance Sheet. In addition to the above two statements, two more statements are also generally added in financial statements, 1. Statement of Retained Earnings, and 2. Statement of Changes in Financial Position (Cash Flow Statement and Funds Flow Statement). Moreover, to supplement the data contained in the above financial statements, certain ‘notes to accounts’ are also prepared, such as Note of Fixed Assets, Note of Trade Receivables, Note of Trade Payables, Note of Inventories, Note of Long-term Investments etc.
According to John N. Myer, “The Financial Statements provide a summary of accounts of a business enterprise, the Balance Sheet reflecting the assets, liabilities and capital as on a certain date and income statement showing the results and operations during a certain period.”
Characteristics of Financial Statements: 1. They relate to a past period and are thus historical documents, 2. Generally, they are prepared at the end of financial year/accounting period, 3. They are expressed in terms of money, 4. They show financial position through Balance Sheet and financial performance through Statement of Profit and Loss.
Nature of Financial Statements: 1. Financial statements are based on recorded facts, 2. Financial statements are prepared as per accounting concepts and conventions, 3. Financial Statements are influenced by the personal judgements of the policy makers, 4. Financial statements are summarised reports, and 5. Financial statements are, generally, prepared at the end of the accounting period.
Objectives of Financial Statements: 1. To provide the various reliable financial information related to business unit, 2. To provide the information of earning capacity of the enterprise, 3. To provide the financial position of the enterprise, 4. To provide the information of changes in financial position, 5. To provide relevant information for financial forecasting and 6. To disclose the information to meet user’s needs.
Characteristics of Ideal Financial Statements: 1. Relevance, 2. Understandability, 3. Comparability, 4. Reliability, 5. Analytical representation, 6. Effective presentation, 7. Authenticity, 8. Promptness, 9. Depict true financial position and 10. Timeliness.
Limitations of Financial Statements: 1. Lack of Precision, Historical in nature, 3. Nature of window dressing, 4. Only interim reports, 5. Disclose only monetary facts, 6. Ignores the price level changes, 7. Influence of Personal Judgement.
Analysis and Interpretation of Financial Statements
Analysis of Financial Statements is a systematic process of critical examination of the financial information contained in the financial statements to understand and make decisions regarding the operations of the enterprise. The Analysis of Financial Statements is a study of relationships among various financial figures as setout in the financial statements.
Objectives of Financial Statement Analysis: 1. Assessing the Earning Capacity or Profitability, 2. Assessing the short-term and Long-term Solvency of the enterprise, 3. Assessing the Managerial Efficiency, 4. Forecasting and Preparing Budget, 5. Inter-firm Comparison, 6. Intra-firm Comparison.
Types of Financial Statement Analysis
- Based on Sources of Information: (i) Internal Analysis, (ii) External Analysis.
- Based on the Objectives of the Analysis: (i) Short-term Analysis, (ii) Long-term Analysis.
- Based on the Modus Operandi: On this basis, the financial analysis may be of the following two types:
(i) Horizontal or Dynamic Analysis: It is also known as “Trend Analysis’ or ‘Time-Series Analysis’ or ‘Intra-firm Analysis’. This analysis is based on statements of a number of years of the same firm. It is useful for long-term trend analysis and planning. Comparative financial statements, trend analysis, funds flow analysis, cash flow analysis, etc. are the examples of horizontal analysis.
(ii) Vertical Analysis: It is also known as ‘Static’ or Structural analysis. This analysis is made to review and analyses the financial statements of one year only. Such an analysis is useful in comparing the performance of several companies of the same type or divisions or departments in one enterprise. Ratio analysis and common-size statements are examples of vertical analysis.
Methods or Devices of Financial Analysis
Financial statements have information about assets, liabilities, equity, revenues, expenses and profit or loss of an enterprise in absolute amounts. It is the serious handicap of financial statements that they do not offer any readymade solution to managerial problems. Therefore, these have to be systematically analysed in the most accepted universal norms. The following are the important techniques/tools/methods or devices of financial statement analysis:
- Compartive Financial Statements, 2. Common Size Financial Statements, 3. Trend Analysis, 4. Average Analysis, 5. Ratio Analysis, 6. Funds Flow Analysis and 7. Cash Flow Analysis.
Financial Statements Bcom Notes