Sector Industria

FINANCIAL

POSITION

can be well understood if a business is taken as an organization that uses ‘inputs’ to ‘produce’ output.

Balance Sheet

It is a statement of financial position of a business at a specified moment of time. It represents all assets owned by the business at a particular moment of time and the claims of the owners and outsiders against those assets at that time. The important distinction between as income statement is for a period while balance sheet is on a particular date.

Statement of Retained Earnings

The term retained earnings means the accumulated excess earnings over losses and dividends. The balance shown by the income statement is transferred to the balance sheet through this statement after making necessary appropriations. It is fundamentally a display of things that have caused the beginning of the period retained earnings balance to be changed in to the one shows in the end-or-the-period balance sheet.

Statement of changes in financial position

The balance sheet shows the financial condition of the business at a particular moment of time while the income statement discloses the results of operations of business over a period of time for a

better understanding of the affairs of the business, it is essential to identify the movement of working capital or cash in the statement of changes in financial position.

Nature of Financial Statements

The financial statements are prepared on the basis of recorded facts. The recorded facts are those which can be expressed in monetary terms. The statements are prepared for a particular period, generally one year. The transactions are recorded in a chronological order as and when the events happen. The financial statements by nature are summaries of the items recorded in the business and there statements are prepared periodically generally for the accounting period.

The following points explain the nature of financial statements

1. Recorded Facts

The term ‘Recorded facts; refers to the data taken out from the accounting records. The records are maintained on the basis of actual cost data. The figures of various accounts such as cash in hand, cash at bank, bills receivables, Sundry debtors, fixed assets are taken as per the figure recorded in the accounting books. As the recorded facts

are not based on replacement costs the financial statements do not show current financial condition of the concern.

2. Accounting Conversions

Certain accounting converters are followed while preparing financial statements. The conversion of valuating inventory at cost or market price, whichever is lower, is followed. The valuing of assets at cost less depreciation principle for balance sheet purposes statements comparable, simple and realistic.

3. Postulates

The accountants make certain assumption while making accounting records. One of these assumptions is that the enterprise is treated as a going concern. The other alternative to this postulate is that the concern is to be liquidated the concern. So the assets are shows on a going concern basis. An other important assumption is to presume that the value of money will remain in the same in different periods.

4. Personal Judgments

Even though certain standard accounting conversions are followed in preparing financial statement but still personal judgment of the accountant plays on important part.

Characteristics of financial statement

The financial statements are prepared with a view to depict financial position of a concern. The financial statements should be prepared in such a way that they are able to give a clear and orderly picture of the concern. The ideal financial statement has the following characteristics.

1. Depict true financial position

The information contained in the financial statements should be such that a true and correct idea is taken about the financial position of the concern.

2. Attractive

The financial statements should be prepared in such a way that important information is underlined so that it attracts the eye of the reader.

3. Comparability

The results of financial analysis should be comparable. The financial statements should be presented in such a way that they can be compared to the previous year’s statements. Previous year’s figures in the balance sheet.

4. Brief

If possible, the financial statements must be prepared in

brief. The reader will be able to form as idea about the figures.

Importance of financial statements

Financial statements contain a lot of useful and valuable information regarding profitability financial position and future prospective of business concern. The utility of financial statement to different parties may be summarized as follows:

1. Management

The financial statements are useful for assessing the efficiency ofdifferent cost centers. The management is able to decide the course of action to be adopted in future.

2. Creditors

The trade creditors are to be paid in a short period. The CRS will be interested in current solvency of the concerns. The calculations of current ratio and liquid ratio will enable the creditors to assess the current financial position of the concerns in relation to their debts.

3. Investors

The investors include both short-term and long term investors.

They are interested in the security of the principal amounts of loan and regular payments by the concern. The investors will not only analyse the parent financial position but will also study the future prospectus

and expansion plans of the concern.

4. Government

The financial statements are used assess tax liability of business enterprises. The Government studies economic situation of the country from these statements. These statements enable the government to find out whether business is following various rules and regulations or not.

5. Trade Association

These associations provide service and protection to the members. They may analyse the financial statements for the purpose of providing facilities to these members. They may develop standard ratios and design uniform system of accounts.

6. Stock Exchange

The stock exchange deal in purchase and sale of securities of different companies. The financial statements enable the stock broker to judge the financial position of different concerns. The fixation of prices for securities etc. is also based on the statements.