Financial Accounting Statements Assignment Help
Financial Statements show the effects that business transactions and events have on an organization financially. The main purpose of Financial Statements of a company is to represent its formal records regarding its financial dealings and economic situations. Standard Financial Statements exist in the form of reports in the process of quantifying companies’ or organizations’ strengths financially, besides their performance and liquidity situations. Financial Statements are extremely essential components of business information. Principally, they are used to communicate financial information to external stakeholders such as investors.
5 Characteristics of Financial Statements
- Understandability: Financial statements should clearly present information with adequate details to enable users to readily understand them.
- Relevance: The information presented in financial statements must always be aligned to the decision making needs of their users.
- Reliability: Financial statement information should not be misleading besides being free from error and bias.
- Comparability: The financial information as presented by the financial statements should enable users to identify trends regarding organizational performance and financial position.
- Timeliness: All the financial statement information should always be prepared and presented within a relevant timespan. The preparations should particularly commence immediately after financial period closure.
4 major Financial Statements
There are four types of financial statements, which include statement of financial position, income statement, cash flows statement, and statement of changes in equity. These financial statements are discussed below.
Statement of Financial Position
The statement of financial position is also called a Balance Sheet. It shows the financial position of an organization as at a given date. It helps financial statement users in assessing an entity’s financial soundness by determining its liquidity, financial, credit, and business risk components. A Statement of Financial position is composed of three main elements including Assets, Liabilities and Equity. Assets are items such as cash, inventory, and machinery among others that are owned and controlled by an organization. Items owed to other individuals or organizations by an entity such as creditors and bank loans are referred to as liabilities. Equity, on the other hand, represents what a business or entity owes to its owners or shareholders/stockholders.
An income statement is also referred to as a Profit and Loss Account. An income statement portrays an organization’s financial performance over a specified period of time through its net profit or loss indicators. This statement is normally prepared based on the accrual accounting basis. One of its elements is income or revenue, which represents an organization’s earning over a period. The other element includes expenses in the form of items such as salaries and wages, rent and depreciation. Net Profit or Loss is arrived at as the difference between income and expenses.
Cash Flow Statement
This is a representation of an entity’s inward and outward movement of cash and bank balances over a period of time. Segment classification of cash flow movements includes Operating, Investment and Financing activities. Operating activities result in cash flow generation from an organizations’ core or primary activities. Investing activities generate cash flows through the process of purchases and sales of assets besides inventories. Financing activities, on the other hand, impact cash flow through the raising and repayment of share capital and debt apart from the payments of dividends and interest.
Statement of Changes in Equity
It is also known as the Statement of Retained Earnings. Its core function is to provide or show how owners’ or shareholders’ equity moves over a period of time. The components that define the movement of shareholders equity can be categorised into the net profit or loss as reported in the income statement, issued or repaid share capital, paid dividends, equity gains or losses, and the impact of the changes in organizations accounting policy.
How to Present Financial Statements
Proper presentation of financial documents is important to add professionalism after accounting for all transactions and compilation of financial statements. There are no set rules of presentation, but companies tend to follow the same order as indicated below.
- Presentation can either start with a balance sheet or income statement depending on an organization’s preference. A balance sheet presents users with what is owned by a company, what is owed to people by the company, and the owners of a company. The income statement on the other hand shows how much a company makes in terms of profits.
- The financial statement not displayed in step 1 is displayed in step 2.
- Thereafter, a cash flow statement is presented to indicate the movement of money in and out of the company
- The statement of stockholders’ equity is then presented
- Presentation is closed by the notes to the financial statements
In the running of any organization, Financial Statements play a very significant role in the information provided to stakeholders to aid in making critical decisions affecting the operations of an organization such as investment and credit decisions. Information regarding an enterprise’s resources, claims and changes to these resources is also obtainable through financial statements. However, their preparation and presentation in conformity to all the stipulated regulations may at time be quite complex. The good news is that there are numerous accounting homework help companies that are out to always offer guidance with such tasks.