Financial System:

INTRODUCTION
FINANCIAL SYSTEM:

The financial system or the financial sector of any country consists of specialised and non-specialised financial institutions, organised and unorganised financial markets, financial instruments and services which facilitate the transfer of funds. The economic development of any country depends upon the existence of a well-organised financial system.

Meaning of Indian Financial System:

The word “System” in the term “Financial System” implies a set of complex and closely connected or interlinked institutions, agents, practices, markets, transactions, claims and liabilities in the economy. The Financial System is concerned about the money, credits and finance. The responsibility of the financial system is to mobilise the savings in the form of money and monetary assets and invest them in productive ventures.

Financial system plays a very important role in our economy; in fact, it is the heart of our economic structure. The Reserve Bank of India (RBI), the apex institution, is the major constituent of Indian financial system.

Finance Function: “Finance” is the nerve system of an economy. It is rightly termed as the ‘science of money’. We need finance for the production of goods and services as well as their distribution. Finance function assumes an important role in the business system. The efficiency of production and marketing operations is directly influenced by the manner in which the finance function of the enterprise is performed by the finance personnel.

‘Finance’ is the lifeblood of any business organisation. Just as circulation of blood is necessary in human body to maintain life, so also is finance very essential to the business organisation for smooth running of the business.

Financial Performance:
A company’s ability to generate new resource, from day-to-day operations, over a given period of time.

Functions of the financial system:
 Provision of liquidity
 Mobilisation of savings.

Significance of financial system:
 Promoting investments
 Encouraging investments in financial assets
 Allocating savings on the basis of National priorities
 Creating credit
 Providing a spectrum of financial assets
 Financing trade, industry and agriculture
 Encouraging entrepreneurial talents
 Providing financial services
 Developing backward areas
 Economic growth and development.

FINANCIAL STATEMENTS: Financial statements or financial reports are formal records of business financial activities. In British English, including United Kingdom company law, Financial statements are often referred to as “accounts”, although the term financial statements are also used, particularly by accountants. Financial statements provide an overview of a business’ financial condition in both short term and long term.

TYPES OF FINANCIAL STATEMENTS:

There are four basic financial statements:-
 Balance sheet : It is also referred to as statement of financial position or condition, reports on a company’s assets, liabilities and net equity as of a given point of time.

 Income statement :
It is also referred to as Profit and Loss statement (or “P&L” ) reports on a company’s result of operations over a period of time.
 Statement of retained earnings :
It explains the changes in a company’s retained earnings over the reporting period.
 Statement of cash flow:
It Report on a company’s cash flow activities, particularly its operating, investing and financing activities.

Notes to Financial Statements:
These statements are often complex and may include an extensive set of notes. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of financial statements.

PURPOSE of FINANCIAL STATEMENTS

“The objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions”. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, and equity are directly related to an organisation’s financial position. Reported income and expenses are directly related to an organisation’s financial performance.

Financial statements are intended to be understandable by readers who have “a reasonable knowledge of business and economics activities and accounting, and who are willing to study the information diligently”

There are two categories of people (users) that require the financial statements:

 Internal users

 External users

 Internal users:

• Owner financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management’s report to its stockholders, as it forms part of its Annual Report
• Employees also need these reports in making Collective Bargaining Agreements (CBA) with the management, in the case of labour unions or for individuals in discussing their compensation, promotion and rankings.

 External Users :

• These are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for a diverse number of reasons.
• Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often use by investors and is prepared by professionals (financial analysts) , thus providing them with the basis of making investment decisions.
• Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debenture) to finance expansion and other significant expenditures.
• Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company. Media and the general public are also interested in financial