Financial Statements

Final product of every process is something worth explaining, so is the case of the financial statements which are the final product of the whole complex process of financial information system. The term is basically referring to the five documents used for reporting the financial health of a specific organization in the contemporary business world. The set of those five documents is publicly referred to as the financial statements. This term is set out in the GAAP, American framework in relation to the preparation and presentation of those statements as well as IFRS, international framework for the presentation and preparation of the financial statements. Commonly, Financial Statements are referred to as the Financials.

Components of the Financial Statements

As already mentioned, financial statements is a set of five documents. Each document is referred to as the component of the financial statements. The five components are enlisted below:

·         Income Statement

·         Balance Sheet

·         Statement of Changes in Equity

·         Cash flow Statement

·         Notes to the Financial Statements

IFRS and New Nomenclature of the Financial Statements

Recently, IFRS, International Financial Reporting Standards, set out new names of the aforementioned statements keeping in consideration the function of the respective document. Balance sheet is renamed as the statement of the financial position. The rationale behind the new name is that it precisely and briefly describes the very purpose and function of the Balance sheet which is to express and report about the financial position at any specific point of time in relation to any business entity. Income statement is renamed as the Statement of comprehensive income and again the name is precisely and briefly reporting about the purpose of the statement that it documenting and reporting about the net income of the organization which is the difference of the organizational revenues and expenses. The name of the Statement of Changes in Equity is same. The statement of changes in equity reports about the wealth of the Owner that is invested in the Business and is referred to as the Equity. The statement presents the changes that have occurred between the opening and closing balances of the Equity and the nature of those changes that exactly sets the equity on rise and what cause it to fall.

Cash Flow statement is the last statement which is renamed to be the Statement of the Cash Flows. There do not seem to be any significant difference in the name apart from rearranging the words that do not have any purpose apart from making the name of the document similar to the names of the other statements. Cash flow statement precisely and briefly reports about the important asset of all the businesses in the present day business world and that is Cash. Business cannot always go for conducting business on credit as it will cause lag in the operations. This is why the operations on the small scale such as paying short-term liabilities, paying for the expenses require the cash. The statement presents the reconciliation between the opening and closing cash and what sort of changes that exactly set the cash to rise and what cause it to fall. Notes to the financial statements presents the descriptions and explanations in relation to the policies implemented regarding the finalization of the financial statements and the breakup of important figures that used to be presented on the face of the financial statements.

Financial Statements

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.