1. Explain the various financial statements like balance sheet, income statement, and statement of cash flow and owner’s equity with its advantages and disadvantages of preparing this statement with an example.
Financial statements provide information of value to company officers and various external parties, such as investors and lenders of funds. Publicly owned companies are required to publish general-purpose financial statements that include a balance sheet, income statement, and statement of cash flows. Financial statements issued for external distribution are prepared according to generally accepted accounting principles (GAAP).
The balance sheet shows the value of the assets, liabilities, and owners' equity of the company at a specific point in time. The assets are the firm's resources, financial or nonfinancial, such as cash, inventories, properties, and equipment. The total assets equal the sources of funding for those resources: liabilities and equity. Below is an example of a Balance Sheet;
Balance Sheet as at 31 Dec 2009
Equity and Liabilities
Long Term Liabilities
Long term debts
18,000 Furniture and Fitting
Total Fixed Assets
Total Current Assets
Total Current Assets
The balance sheet is presented in two sides on the left and right. The left side is called the asset side where it shows the resources owned by the company. Assets are break into current and fixed. Current assets normally have a life span of less than a year and it will be easily converted to cash. Such assets normally include account receivables, cash, prepay expenses and inventory. Fixed assets are assets that are not easily convert to cash within a short period of time. They could be tangible assets like equipment, fixture and fitting, machinery, building and land. Intangible assets would be assets that are not physical but has valve in it such as copyrights, patents and goodwill. The right side of the balance sheet is called equity and liabilities side, presenting the amount of figure of liabilities. Similarly to the asset side, it has current and long term liabilities. Shareholders' equity is the initial amount of money invested into a business by the shareholders or partners.
The advantage of reading a balance sheet is that it presents the immediate financial position of the business by showing assets and liabilities of the concern on a specific date. In comparing past balance sheets with the present balance sheet, the growth or decline of the business assets, loans and net worth can be determined instantly. It discloses the solvency of business by showing how much assets are available for payment of liabilities. However, Balance sheet does not give accurate picture on real time basis since outdated valued of assets is used, the use of estimate of value and omission of intelligence like the model and business of the company depended on its success whether on its fixed assets or its human resources.
Income statement is also known as profit and loss statement, earnings statement, operating statement or statement of operations. It is a company's financial statement that shows how the revenue is transformed into the net income, it shows the financial position over a period of time....
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