Financial statements are written records that highlight the firm’s activities and the financial status of a business. The report is examined by government firms, accountant, and agencies etc. to guarantee efficiency which can be used for financing, tax, and investing purposes.
Financial statements are categorised into three different parts.
- Balance sheet –It presents a description of the financial status of the organisation; it’s liabilities, assets, and stockholders’ equity.
- Income statement – It gives an insight on revenue, expenses, profit & loss report, and comprehensive income. It also reports on the company’s operations.
- Cash flow statement – It shows an entity’s cash flows and if there are any changes, including investing, financing activities, and operating for the reporting period.
Five top points why Financial Statementis important- First, to scan the business ability to produce cash and utilise it efficiently.
- Second, to determine whether the organisation has the ability to return its debts.
- Third, to track the businesses financial results and check if there are any profitability issues.
- Forth, to obtain financial ratios and show the business condition.
- Fifth, to look into specific company’s transactions that are reported along with the statements.
Uses of Financial Statements
- Bridging the Gap in Management – The financial statements reveals a firm’s financial accomplishments (profits and liabilities). It conveys how fruitful a company’s choices and decisions have been. So, it assists in bridging the gap between the management and the owner’s expectations.
- Assist Creditors – This statement is mostly used by creditors, investors, and market analysts to analyse and estimate the financial strength and future potential and profits of a firm.
- Give an insight to Investors – Financial analysts and investors depend on such financial statements to examine the business performance and predictions about the company’s future stock price. The most important reliable financial data is the annual report, which reports all the businesses financial statements.
- Government Use – Governmental policies associated with corporates rely on financial statements as it shows how companies are operating. Depending on the report, the government decides on policies and taxation.
- Support for Stock Exchanges – Various stock exchange and regulatory bodies depend on an organization’s internal matters to protect the investors. Stock advisers refer to this statement to fix a quotation as it is believed to be a great source of information. SEBI, NSE and BSE are few such examples.
- Knowledge of Investments – A company’s shareholders depend on these statements to get an insight into their investment growth. If a business is making profits, then they might think of investing more money. Similarly, losses or even stagnant gains may trigger them to stop their investment.
Limitations of Financial Statements
- Does Not Reflect Current Financial Position – The statements don’t reveal how good a firm is doing in the present time as it is prepared at the end of every fiscal year.
- Chances of Bias – It does not give an accurate representation of a firm as it is formed on several individual conventions, judgments and internal policies.
- Important Information for not specified – The accountants tend to miss vital facts while preparing financial statements. Such as the nature of agreements signed by the firm.
- Absence of Qualitative Details – Though the entire finance and numbers are mentioned in the annual statements, a lot of qualitative data can be missed out. Such as the firm’s employees’ productivity and industrial relations
- Insufficient Details –The reports include the value of the total assets of assets, but do not publish these assets nature.
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FAQs
Accounting can be defined as a process of reporting, recording, interpreting and summarising economic data. The introduction of accounting helps the decision-makers of a company to make effective choices, by providing information on the financial status of the business.
Which financial statement answers the question how much income? ›
A company's income statement provides details on the revenue a company earns and the expenses involved in its operating activities. The cash flow statement provides a view of a company's overall liquidity by showing cash transaction activities.
How many chapters are in +1 accountancy? ›
CBSE Class 11 Accountancy is comprised of a total of 15 chapters, i.e. Introduction to Accounting, Theory Base of Accounting, Recording of Transaction - I, Recording of Transaction - II, Bank Reconciliation Statement, Trial Balance and Rectification of Errors, Depreciation, Provision, and Reserves, Bill of Exchange, ...
What is accounting full answer? ›
What Is Accounting? Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.
Who is the father of accounting? ›
Luca Pacioli is the father of accounting.
Which is the most important financial statement? ›
Types of Financial Statements: Income Statement. Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.
What are the three main financial statements? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What questions are answered by the income statement? ›
The income statement focuses on the revenue, expenses, gains, and losses of a company during a particular period. An income statement provides valuable insights into a company's operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers.
Which is the most difficult chapter in accounts class 11? ›
Which chapter is the most challenging in Class 11 Accountancy? Depreciation, Provisions, and Reserves, the seventh chapter of the Class 11 accountancy syllabus, is considered one of the longest and most difficult chapters.
Is accounting 1 a hard class? ›
Accounting is a complex field with a lot of intricacies, but the foundational concepts should be fairly easy to pick up for most students. Again, it takes a good eye for detail to become an accountant and even your Introduction to Accounting class shouldn't be a walk in the park.
There are 8 limitations: Historical Costs, Inflation Adjustments, No Discussion on Non-Financial Issues, Bias, Fraudulent Practices, Specific Time Period Reports, Intangible Assets, and Comparability.
What is accounting in Grade 11? ›
Grade 11. Prerequisites: None. 4 Units, 29 learning activities. This course introduces students to the fundamental principles and procedures of accounting. Students will develop financial analysis and decision-making skills that will assist them in future studies and/or career opportunities in business.
What is accounting in few words? ›
Accounting is the process of recording, classifying and summarizing financial transactions. It provides a clear picture of the financial health of your organization and its performance, which can serve as a catalyst for resource management and strategic growth.
What is accounting one word answer? ›
Accountancy is referred to as the process of recording financial transactions that take place in a business.
What is accounting cycle class 11 short answer? ›
Accounting cycle is a process of recording all the financial transactions and processing them. When a complete sequence of recording and processing financial transactions is followed which happens frequently on a continuous basis during an accounting period is known as the accounting cycle.
