Introduction to Financial Statements

Study Notes

Financial statements provide a summary of a business's financial position and performance
They are the end result of financial accounting
Multiple sources define financial statements as a structured representation of a business's financial condition, operational results, and allocation of earnings

Rely on recorded facts that can be expressed monetarily
Cover a specific period, usually a year
Transactions are recorded chronologically
Based on historical costs
Represent summaries of business activities
Are created periodically, typically for accounting periods
American Institute of Certified Public Accountants (AICPA) and American Accounting Association (AAA) highlight the importance of consistent accounting principles for accurate financial statement reporting

Primarily composed of two statements:
- Balance Sheet: A snapshot of a company's assets (what it owns), liabilities (what it owes), and equity (ownership value) at a specific point in time
- Income Statement: A summary of a company's revenues and expenses over a specific period, resulting in a profit or loss
GAAP requires a complete set of financial statements:
- Balance Sheet
- Income Statement
- Statement of Changes in Owners' Equity: Tracks changes in shareholder ownership over time
- Statement of Changes in Financial Position: Analyzes how a company's financial position has changed over time

AICPA defines it as a tabular summary of account balances after closing the books
Shows the company's resources (assets) and their sources (liabilities and equity)
Indicates the company's financial strength
Presents a balanced view: assets on one side, liabilities and equity on the other
Prepared on a specific date
The Companies Act 1956 prescribes a specific format for balance sheets of registered companies, requiring historical comparative data

Reports on a company's performance over a period
Shows revenue earned and expenses incurred to generate that revenue
Highlights profit (excess of revenue over expenses) or loss (excess of expenses over revenue)
Covers a specific period, typically a year
The liquidity form is suitable for financial institutions
The Companies Act 1956 prescribes specific formatting for income statements

Revised Schedule VI emphasizes a vertical format for Balance Sheets
Specifies a detailed structure for presenting balance sheet information, including:
- Equity and Liabilities: Separating equity, reserves, long-term borrowings, provisions, others, and short-term provisions
- Assets: Classifying current assets, fixed assets, and intangible assets
Emphasizes clarity and transparency in financial reporting

Requires a specific format for balance sheet presentation, as outlined in Schedule VI Part I
Includes columns for:
- Particulars (categories of assets, liabilities, and equity)
- Note No. (references to explanatory notes)
- Figures as at the end of the current reporting period
- Figures as at the end of the previous reporting period
Provides a standardized structure for comparing financial information over time

Equity and Liabilities:
- Equities: Represents ownership interest in the company
- Reserves and Surplus: Accumulated profits or losses
- Long-Term Borrowings: Debt obligations with maturities of one year or more
- Short-term Provisions: Funds set aside for potential future obligations
Assets:
- Current Assets: Resources that are expected to be converted into cash or used up within one year
- Non-current Assets (Fixed Assets): Resources that are expected to be used for more than one year
  - Intangible assets: Assets that lack physical form, such as goodwill, trademarks, and patents
  - Tangible assets: Assets that have physical form, such as land, buildings, and equipment
Ensures that all sections of the balance sheet are thoroughly accounted for

Equity and Liabilities:
- Equity:
  - Share capital: Includes details of issued and paid-up capital, calls unpaid, and forfeited shares
- Reserves and Surplus:
  - Details of various types of reserves, including capital reserves, capital redemption reserve, securities premium reserve, reserves relating to the redemption of preference shares and debentures
  - Surplus: Profit or loss carried forward
- Long-Term borrowings: Detailed classification of borrowings based on their terms and nature, including bonds, debentures, term loans, loans from related parties, and deferred payment liabilities
- Provisions: Includes provisions for employee benefits and other potential liabilities
Assets:
- Tangible assets: Detailed classification of tangible assets as per their nature, including land, buildings, plant and equipment, furniture and fixtures, vehicles, and office equipment
- Intangible assets: A thorough list of intangible assets including goodwill, brands, computer software, patents, copyrights, licenses, and franchises
Promotes detailed and comprehensive reporting of financial information