The output of the accounting information system is referred
to as the Financial statements. They essentially sets out the information about
the financial aspect of the operations of any specific entity that it how much
profit the entity has grossed up in a specific year, its accumulated financial
wealth or the change in the financial wealth during the current year financial
year operations.
Preparation of the Financial Statements
Firstly, there are rules, assumptions that govern the
process of the preparation of the financial statements. Over and above, in an
attempt to effect an harmony between the financial statements around the globe,
International Accounting Standards Board is striving hard and has promulgated
comprehensive standards in this regard, referred to as the International
Financial Reporting Standards (IFRS). These rules are the global rules that are
implemented in relation to the preparation of the financials. The national
accounting regulations need to be implemented in relation to preparation of the
financials in addition to IFRS with regard to presentation and formatting
requirements, wherever there is conflict, it is inevitable to give preference
to the national accounting standards and regulations. There are certain
accounting principles, assumptions and conventions that are the basis of all
the standards promulgated or under consideration, financial statements are
prepared following these accounting principles, assumptions and conventions.
Financial Statements Components
Globally there are five components, stated differently,
elements of the financial statements. These are income statement, Balance Sheet, Cash Flow Statements, Statement of
Changes in equity and the notes to the financial statements. All those
serve different purposes and distinct financial needs of the users,
stakeholders. This is the rationale that a complete set of financial statements
essentially contain these five components, elements. Balance sheet represent
what is the financial worth of any specific business at any specific point of
time. The Balance sheet is usually prepared at the end of the reporting period
and is prepared periodically at the end of each subsequent period. Income
statement essentially the first financial statement that is perused and reports
about whether the business earned profit or incurred loss in any specific
financial year.
Financial Statements Relationship
The financial statements are quite related to one another.
There is a specific order in the preparation of the financial statements. For
example, income statement is the first financial that is prepared and
presented. The net income figure in the financial statement is necessary in
order to complete the Balance Sheet Equity portion, which is subsequently used
to prepare the statement of changes in equity financial statement. Similarly,
the net income figure is also necessary in the preparation of the Cash flow
statement using the indirect method. The notes to the financial statements
explains in a bit detail the line items in the respective financial statement
apart from setting out the accounting policies implemented by the organization
in the making of the financials. This is how the financial statements have
relationship to each other and they are interpreted integrally using the
financial rations to assess if the company is financially sound and stable.
Audit of the Financial Statements
It is important to audit the financial statements as it
establishes even more reliability that the financial statements are quite
fairly representing the financial results of the company. The audit can be
executed by the internal auditors or the external auditors, however, the audit
by the external auditors is more reliable as the external auditor are
independent and do not report to the management of the organization.
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