Financial Statements of a Company

Financial Statements of a Company

1. Introduction to Financial Statements

Financial statements are formal records of the financial activities and position of a business, person, or other entity. They provide a summary of the financial performance and financial position of the company, offering insight to investors, creditors, and other stakeholders.

2. Components of Financial Statements

The main components of financial statements include:

1. Balance Sheet
2. Statement of Profit and Loss
3. Cash Flow Statement
4. Statement of Changes in Equity
5. Notes to Accounts

3. Balance Sheet

The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It consists of three main sections:

1. Assets: Resources owned by the company.

• Non-Current Assets: Includes fixed assets like property, plant, and equipment, intangible assets, and long-term investments.
• Current Assets: Includes cash and cash equivalents, inventory, accounts receivable, and other short-term assets.

1. Liabilities: Obligations the company owes to others.

• Non-Current Liabilities: Long-term debts like bonds payable, long-term loans, and deferred tax liabilities.
• Current Liabilities: Short-term obligations like accounts payable, short-term loans, and other current liabilities.

1. Equity: The residual interest in the assets of the entity after deducting liabilities. It includes:

• Share Capital: Funds raised by issuing shares.
• Reserves and Surplus: Retained earnings and other reserves.

Format of Balance Sheet:

Particulars                                   Amount
--------------------------------------------  --------
I. Equity and Liabilities
  1. Shareholders' Funds
     (a) Share Capital
     (b) Reserves and Surplus
  2. Non-Current Liabilities
     (a) Long-term Borrowings
     (b) Deferred Tax Liabilities (Net)
     (c) Other Long-term Liabilities
     (d) Long-term Provisions
  3. Current Liabilities
     (a) Short-term Borrowings
     (b) Trade Payables
     (c) Other Current Liabilities
     (d) Short-term Provisions

II. Assets
  1. Non-Current Assets
     (a) Property, Plant, and Equipment
     (b) Intangible Assets
     (c) Capital Work-in-Progress
     (d) Non-Current Investments
     (e) Deferred Tax Assets (Net)
     (f) Long-term Loans and Advances
     (g) Other Non-Current Assets
  2. Current Assets
     (a) Current Investments
     (b) Inventories
     (c) Trade Receivables
     (d) Cash and Cash Equivalents
     (e) Short-term Loans and Advances
     (f) Other Current Assets

4. Statement of Profit and Loss

The statement of profit and loss shows the company’s financial performance over a specific period. It includes:

1. Revenue: Total income generated from operations.
2. Expenses: Costs incurred in generating revenue, including cost of goods sold, operating expenses, and taxes.
3. Profit or Loss: The difference between revenue and expenses.

Format of Statement of Profit and Loss:

Particulars                                   Amount
--------------------------------------------  --------
I. Revenue from Operations
II. Other Income
III. Total Revenue (I + II)
IV. Expenses
   (a) Cost of Materials Consumed
   (b) Purchases of Stock-in-Trade
   (c) Changes in Inventories of Finished Goods, Work-in-Progress, and Stock-in-Trade
   (d) Employee Benefits Expense
   (e) Finance Costs
   (f) Depreciation and Amortization Expense
   (g) Other Expenses
V. Total Expenses
VI. Profit before Exceptional and Extraordinary Items and Tax (III - V)
VII. Exceptional Items
VIII. Profit before Extraordinary Items and Tax (VI - VII)
IX. Extraordinary Items
X. Profit before Tax (VIII - IX)
XI. Tax Expense
   (a) Current Tax
   (b) Deferred Tax
XII. Profit for the Period from Continuing Operations (X - XI)
XIII. Profit from Discontinuing Operations
XIV. Tax Expense of Discontinuing Operations
XV. Profit from Discontinuing Operations (after tax) (XIII - XIV)
XVI. Profit for the Period (XII + XV)
XVII. Earnings per Equity Share
   (a) Basic
   (b) Diluted

5. Cash Flow Statement

The cash flow statement shows the inflows and outflows of cash during a specific period. It is divided into three sections:

1. Operating Activities: Cash flows from primary revenue-generating activities.
2. Investing Activities: Cash flows from buying and selling assets, like property and investments.
3. Financing Activities: Cash flows from transactions with shareholders and creditors, like issuing shares or borrowing money.

6. Statement of Changes in Equity

This statement shows the changes in a company’s equity during a specific period. It includes:

1. Opening Balance of Equity
2. Additions (Profit, Issue of Shares, etc.)
3. Deductions (Loss, Dividends, etc.)
4. Closing Balance of Equity

7. Notes to Accounts

Notes to accounts provide detailed information and explanations about the items in the financial statements. They include:

1. Accounting Policies: The principles and methods used in preparing financial statements.
2. Explanatory Notes: Additional details on specific items in the financial statements, like breakdowns of expenses or details of contingent liabilities.
3. Disclosure Requirements: Information required by accounting standards or regulations.

8. Importance of Financial Statements

1. Decision Making: Helps investors, creditors, and management make informed decisions.
2. Performance Evaluation: Assists in assessing the company’s financial performance and position.
3. Legal Requirements: Ensures compliance with regulatory and legal requirements.
4. Transparency and Accountability: Promotes transparency and accountability in financial reporting.

Conclusion

Understanding the components and importance of financial statements is crucial for stakeholders to assess the financial health and performance of a company. These statements provide valuable insights into the company’s operations, financial position, and cash flows, aiding in effective decision-making and strategic planning.