Financial Statements Analysis Meaning
Financial Statements Analysis Meaning
First of all, it is quite necessary to understand what are the financial statements and what is audit?
Financial Statements
Financial Statements are the statements which incorporate all the financial transactions of an organisation in writing and give results about the financial position of the company.
The financial statements are very useful for owners, shareholders, investors, creditors, financial institutions, tax authorities and others interested in the company's affairs. The main financial statements are as under:
1. Balance Sheet
2. Income Statement
3. Cash Flow Statement
4. Equity Changes Statement
Audit
The audit is the tool in the hands of management which ensures that all the divisions/departments are working properly with economy, efficiency and effectiveness without any kind of risk, fraud and misappropriation. Out of the various types of audit, we will discuss only financial audit here in a precise and effective manner.
Types of Financial Statements
Balance Sheet
This is the main record which incorporates all the financial activities of an organisation and therefore, is the first choice of the investors to analyze the financial position of the business. The balance sheet has two sides i. e. assets and liabilities side.
The assets side includes what the company owns like fixed and floating assets, cash and bank balances, Bill's receivable, debtors, prepaid expenses, fixed and other deposits etc. whereas the liability side includes what the company owes like bills payables, creditors, loans and borrowings, bills payables and also shareholder's and owner's equity.
This financial statement indicates the sum of about all the financial heads of the company which helps the management and investors to make necessary managerial and investment decisions.
Income Statement
This statement shows the profit or loss of the company and therefore, also known as profit and loss account. This statement also has two sides I.e. income and expenditure sides.
Income
This side of the income statement shows the net income of the company after deducting all the expenses after a specified period of time.
Expenditure
This site includes all the expenses incurred by the company to run the business i. e salaries, wages, office expenses, insurance etc.
Cash Flow Statement
Cash flow statement shows the cash and bank balances of all times. It helps to know how early the company can generate cash and discharge its current liabilities.
The main purpose of the cash flow statement is to give the source of cash inflow and outflow in the business. It also depicts the way how the company makes the expenditure.
Equity Changes Statement
This statement shows the position of the change in owner's equity on a specified period. This is also called the statement of retained earnings. The owner's equity is charged due to the following reasons:
- Net profit earned or net loss made during a specified period. The net profit is added in the owner's equity whereas the net loss is deducted, therefore. The net profit or loss fluctuate the owner's equity which is entered into this statement for the information of the concerned persons.
- Owner's drawings is another factor of fluctuations of equity. The owner of the company occasionally adds or withdraw money from the equity which changes equity and entered into this statement.
- Losses or gains due to revaluation or surpluses which are directly charged to equity is also one of the reasons for the change in equity and can be watched through this statement.
- Change in accounting policy and accounting error also change the owner's equity and incorporated in this statement.
The need for Financial Statements
The main financial statements i. e. income statement, balance sheet and cash flow statement together give the complete overview of the financial position of the company.
It gives the most important information like whether the company's cash flows have sufficient resources to make payments of all the bills on the due date or whether the company is capable of repayment of loans and borrowings well in time.
It also tells about the source from where the money comes in and goes out.
It is also very helpful to understand whether the company has the capacity to make profit constantly with at least the same volume of sale and margin of profit.
In case the banks, financial institutions, investors feel any risky situation of the business of the company, they will first go through the financial statements in order to arrive at any further financial decision.
The financial statements are generally prepared at the end of the financial year i. e. on 31st December or 31st March every year. When the company increases its debt either to expand its business or otherwise, it will make it at the end of each quarter or the month as the situation arises.
CONCLUSION
The financial statements as explained above are the most useful financial documents of any company because it gives information about the financial health of an organisation through income statement, fund flow statement and balance sheet which also tells about the financial capacity of the company for repayment of loans and borrowings, meet out the expenses of bills on due dates and keep watch on inflow and outflow of cash.
Though these statements are prepared by the qualified experts/accountants of the company still its reliability cannot be ruled out unless these are duly audited by the qualified auditors under their certificate in writing. The banks, financial institutions, investors generally accept the audited financial statements before taking any investment decision.