Company’s Financial Statement – The Beginner’s Guide

Here in this article, we will be discussing the contents of financial statements. As we all know every registered company is under an obligation to prepare financial statements at the end of an accounting period including Profit & Loss account, Trading account and Balance sheet. The Companies Act, 2013 states that financial statements of a company should be prepared as per the format prescribed in part I of Schedule III of the Act. It is important to disclose all material facts and figures accurately keeping in mind all the accounting principles and conventions laid down by Institute of Chartered Accountants of India (ICAI).

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Section 128 (1) of Companies Act 2013 requires that every company registered under companies act or previous act shall prepare and keep at its registered office books of account and other relevant books for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and books would be kept on accrual basis and according to the double entry system of accounting.

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Main Purpose of Financial Statements

  • Financial statements reflect a corporation’s financial health and provide numerous information about an organization’s expenses, revenues, credibility, liquidity, profitability, debt load, ability to meet long-term as well as short term financial obligations.
  • Financial executives in any organization have the responsibility to disclose a true and fair picture of financial statements for their potential investors, shareholders, creditors, suppliers, taxation authorities, government, general public, banking financial institutions and other interested parties. Apart from a company’s owner and current shareholders, there are many other users who take crucial decisions on the basis of annual financial statements and are interested in knowing the financial position of an organization.
  • Financial Statements also assist in effective strategy formulation and other managerial decisions. The managers & other decision makers have to regularly face economic decisions like- How much material to purchase? Is there enough cash for daily expenses? How much revenue did they generate in the previous accounting year? Formulating strategies to meet targets?

All those, and many other questions and crucial business decisions, require thorough analysis & examination of accounting information which is disclosed only by financial statements.

Various Users of Financial Statements

  • Lenders- Lenders such as state banks, central banks, financial institutions, and bondholders, are interested in knowing the organization’s ability to pay liabilities upon maturity (solvency), before granting huge amounts to avoid any kind of discrepancy.
  • Creditors or suppliers- Like lenders, trade creditors or suppliers are interested in the organization’s ability to pay obligations when they become due. They are especially willing to know the company’s ability to meet its short-term obligations and liquidity flow.
  • Government- Governing bodies of the state, especially our tax authorities, are required to examine an entity’s financial information for taxation, audit, and other regulatory purposes. Taxes are calculated based on the results of transactions occurred during the whole accounting period, and revenue generated. In general, the tax authority wants to know how much the taxpayer makes in an accounting period to determine the tax due thereon.
  • Public- All other interested parties come in the General public category such as researchers or scholars, students, analysts, credit rating agencies, and others. They all are interested in the annual financial statements of a company for some valid reason like publishing their thesis, reviews, etc.
  •  Employees- Employees of any company are interested in having a clear idea of their company’s profitability and stability as they are dependent upon the company’s growth to get their salaries, increments and other employee benefits. They may also be interested in knowing its financial position and performance to evaluate company expansion possibilities and career development opportunities for their personal growth.
  • Customers- When there is a long-term legal contract between the organization and its customers, the customers become interested in knowing the company’s ability to continue its existence and maintain stability of operations. This need is also heightened in cases where the customers are dependent upon the company for its welfare or ROI if he/she has invested in its shares. For example, a distributor, the customer in this case, is dependent upon the manufacturing unit from which it purchases the items it resells.

To Sum Up

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