Explain about various financial statements in financial management.

Financial statements are the reports prepared by a firm to represent their financial activities in an accounting year. These gives how the firm carries its activities, maintain its cash flows and how well the firm is doing in the market.

Nature of financial statements includes −

  • Recording facts.
  • Accounting conversions.
  • Assumptions.
  • Personal judgements.

Objectives of financial statements are as follows −

  • To provide information about economic resources of a firm.
  • To provide information about changes in economic resources of a firm.
  • To provide information about net resources of a firm.
  • To provide information about estimation of earning potential of a firm.

Types of financial statements includes −

  • Balance sheet
    • Assets
    • Liabilities
    • Equity
  • Income statement
    • Income
    • Expenses
    • Profit or loss
  • Cash flow statements
    • Operating activities
    • Investing activities
    • Financing activities

Importance of financial statements is as follows −

  • Management − Based on these statements, management will decide about their future operations and cost control methods, if needed.

  • Creditors − Based on these statements, creditors are able to access current solvency of a firm and estimate its financial position.

  • Bankers − Based on balance sheet, bankers will analyse firm’s financial assets and its earning position by profit and loss accounts. From these statements, bankers will see the firm’s ability to pay the interest in time or not. Based on this, they will release the loan.

  • Investors − Investors will be concerned about long term solvency of a firm. They will analyse present and future position of a firm.

  • Government − Government will see tax liability of a firm. Based on these, they will see the economic situation of the country. Government will also focus on whether firm is following its rules and regulations or not.

  • Trade associations − They see the financial position of the firm as they provide services.

  • Stock exchange − Stock brokers will analyse firm’s financial position in the market by these statements and also fix the price for securities.