FINANCIAL

STATEMENTS
BY
DR.MAHESH
KUMAR.K.R.
M.com., MBA (Marketing), MBA., (I
&RM).,MHRM., MA (Economics)., MS
(Edu.Mgt).,LLB.,PGDFM., PGDBA.,
M.Phil., Ph.D., MSc.,( Psy).,
Meaning:

Financial statement is a collection of data

organized according to logical and consistent
accounting procedures. In other words,
financial statements are the outcome of
summarizing process of accounting.
Definition

Smith and Asburn define financial statements as

“the end product of financial accounting in a set
of financial statements prepared by the accountant
of a business enterprise—that purport to reveal
the financial position of the enterprise, the result
of its recent activities, and analysis of what has
been done with earnings”.
NATURE OF FINANCIAL STATEMENTS

• Recorded facts
• GAAPs
• Postulates (Assumptions)
• Personal judgements
 COMPOSITION OF FINANCIAL REPORTS
1. Financial statements
a)Profit and Loss account (Income Statement)
b) Balance Sheet
 
2. Reports
a)Directors’ report
b)Chairman’s speech (Delivered at the Annual General
Meeting)
c) Auditors’ report

3. Schedules
a) Schedule of Fixed assets b) Schedule of Longterm
investements c) Schedule of inventories d) Schedule
of reserves e) schedule of longterm liabilities etc.,

4. Explanatory notes
a) Depreciation methods b) Inventory valuation methods c)
Details of contingent liabilities etc.,

5. Statements of changes in financial position

a) Fund flow statement b) Cash flow statement
 OBJECTIVES OF FINANCIAL
STATEMENTS
1. To provide adequate information about the financial
performance and the assets, liabilities and capital of the
business entity.
2. To provide useful information about predicting, comparing
and evaluating the earning capacity of the business entity.
3. To provide required information to different interested
parties in the business entity.
4. To provide needed information about changes in economic
resources and obligations.
 LIMITATIONS OF FINANCIAL
STATEMENTS

1. Fulfilment of statutory requirements

2. Historical data
3. Interim reports
4. Emphasis on only quantitative information
5. GAAP
6. Personal judgements
7. Opportunities for Manipulation (Window dressing)
8. Failure to recognize the changes in the price level
 USE AND IMPORTANCE OF
FINANCIAL STATEMENTS
• As a basis for granting credit
• As guide to advise dividend action
• As informative for prospective investors
• To determine the legality of dividends
• As a guide to the value of investment already
made
• As basis for price or rate regulation
• As a basis for taxation
• As an aid to government supervision
 PARTIES INTERESTED IN
FINANCIAL STATEMENTS
• MANAGEMENT
• CREDITORS
• BANKERS
• INVESTORS
• GOVERNMENT
• TRADE ASSOCIATIONS
• STOCK EXCHANGES
• RESEARCHERS
• ECONOMISTS
• EMPLOYEES
• GENERAL PUBLIC
 FINANCIAL STATEMENTS
ANALYSIS
• MEANING:
• “the process of identifying the
financial strengths and weaknesses
of the firm by properly establishing
relationship between the items of the
Balance sheet and the Profit and loss
account”
 MEANING OF FINANCIAL
“ANALYSIS”
• The simplification of financial data by
methodical classification of the data
given in the financial statements.
 MEANING OF FINANCIAL
“INTERPRETATION”
• Explaining the meaning and
significance of the data so simplified.
TYPES OF FINANCIAL ANALYSIS
1) on the basis of material used
a)External analysis
b) Internal analysis

2) On the basis of modus

operandi/operation
a) Horizontal analysis
b) Vertical analysis
 METHODS OR DEVICES OF
FINANCIAL ANALYSIS
1) COMPARATIVE STATEMENTS
2) COMMON-SIZE STATEMENTS
3) TREND ANALYSIS
4) FUNDS FLOW ANALYSIS
5) CASH FLOW ANALYSIS
6) RATIO ANALYSIS
7) COST-VOLUME-PROFIT ANALYSIS