Chapter = 2

“The term financial statements as used in modern business, refers to the two statements which the accountant prepares at the end of a period of time for a business enterprise. They are the balance sheet, or a statement of financial position and the income statement, or profit and loss statement.”

Financial statements

Income StatementBalance SheetStatement of Retained Earnings Statement of changes in financial position

Types of Financial Statements

“The statement of profit and loss is the condensed and classified record of the gains and losses causing changes in the owner’s interest in the business for a period of time.”

Income statement

Manufacturing account Trading account Profit and Loss account Profit and Loss Appropriation account

Types of Income Statement

“The balance Sheet is, thus, a detailed form of the fundamental, or structural equation, it sets forth the financial structure of an enterprise. It states the nature and amount of each of various assets, of each liabilities and of the proprietary interest of the owners.”

Balance Sheet

Assets=Liabilities+Paid up capital +revenue -Expenses

Relationship between Profit and Loss a/c Balance Sheet

Recorded FactsAccounting ConventionsPersonal Judgements

Nature of Financial Statements

Relevant to PurposeComplete and Accurate InformationComparabilityFacilitating AnalysisSimplicityRight TimeCompliance with Legal Requirements

Essentials of Good Financial Statements

Incomplete and Inexact InformationQualitative Informations are ignoredHistorical InformationBased on accounting concepts and

conventions Influenced by persona judgements Being IncomparableStatic StatementValue of Human Resources Not being Fully

Disclosed

Limitations of Financial Statements

Financial Statement Analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements and a study of the trends of these factors, as shown by a series of statements.”

Financial Statement Analysis

Determining objectives of AnalysisRearrangements of FactsApproximation of FiguresComparisonStudy of TrendsTo Draw Conclusions Reporting

Process of Financial Analysis

Types of Financial Analysis

Types

On the basis of material used

On the basis of process

External analysis

Internal anallysis

Horizontal analysis

Vertical analysis

For managementFor creditorsFor investorsFor labourFor the GovernmentFor the Public

Objective and Significance of Financial Analysis