Financial Statements

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After studying this chapter, you will be able to:
Explain the meaning of financial statements of a company; •Describe the form and content of balance sheet of a company; •Prepare the Balance Sheet of a company as per Schedule VI Part I of the Companies Act 1956. • Know the major headings under which the various assets and liabilities can be shown. •Explain the meaning, objectives and limitations of analysis using accounting ratios •Calculate various ratios to assess the solvency, liquidity, efficiency and profitability of the firm. • Interpret the various ratios for inter and intra-firm comparison.

define Cash Flow Statement
know its objectives
understand its uses [Uses of Cash Flow Statement]
explain the Limitations of Cash Flow Statements
classify the Cash Flows as
•.cash flow from Operating Activities
•.cash flow from Operating
•.cash Flow from Financing Activities
make a format of Cash Flow Statement as per Revised AS-3. •prepare Cash Flow Statement in a Prescribed Format.

1.0 The financial statements are the end products of the accounting process which summaries the financial position and performance of a business concern in an organized manner. Financial Statements provide a summarized view of the operations of the business. They serve as an important medium in communicating accounting information to various users of accounts.

If you can read a cricket scoreboard, you can learn to read basic financial statements. Let’s begin by looking at what financial statements do.

1.1 Financial Statements of a company
Financial Statements show you where a company’s money came from, where it went, and where it is now. Financial statements are the basic and formal annual reports through which the corporate management communicates financial information to its owners and various other external parties which include-investors, tax authorities, government, employees, etc. There are two main financial statements. They are: (1) balance sheets; (2) income statements. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Let’s look at the Balance Sheet in more detail.


1.2 Investors and potential investors

The present investors want to decide whether they should hold the securities of the company or sell them. Potential investors, on the other hand, want to know whether they should invest in the shares of the company or not.

Investors (Shareholders or owners) and potential investors, thus, make use of the financial statements to judge the present and future earning capacity of the business, to judge the operational efficiency of the business and to know the safety of investment and growth prospects.

Lenders/long term creditors
Financial statement helps lenders such as debenture holders, suppliers of loans and leases in ascertaining the long term and short term solvency of the business. They like to know the financial soundness of the business i.e. the ability of the business to repay debt on maturity and whether the enterprise earns sufficient profits so as to pay interest regularly.


Analysis of financial statements enable the management to evaluate the overall efficieny of the firm. It helps to ascertain the solvency of the enterprise; to know about its viability as a going concern and to provide adequate information for planning and controlling the affairs of the business. Future forecasts can easily be made by analyzing the past date.

Suppliers/short term creditors
Creditors/suppliers supplying goods to a business are interested to know as to whether the business would be in a position to pay the amounts on time. They are interested in short-term solvency i.e. the liquidity of the business.

They are more interested in current assets...
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