The principal means of reporting general-purpose financial information to persons outside a business organization is a set of accounting reports called financial statements. The persons receiving these reports are termed the users of the financial statements. A set of financial statements consists of four related accounting reports that summarize in a few pages the financial resources, obligations, profitability, and cash transactions of a business.
A complete set of financial statements includes: 1) Balance Sheet 2) Income Statement 3) Statement of owner’s Equity 4) Statement Of cash Flows Kinds of Financial Statements: 1) A balance sheet, showing at a specific date the financial position of the company by indicating the resources that it owns, the debts that it owes, and the amount of the owner’s equity (investment) in the business. 2) An income statement, indicating the profitability of the business over the preceding year (or other time period). ) A statement of owner’s equity, explaining certain changes in the amount of the owner’s equity (investment) in the business. (In businesses which are organized as corporations, the statement of owner’s equity is replaced by a statement of retained earnings. ) 4) A statement of cash flows, summarizing the cash receipts and cash payments of the business over the same time period covered by the income statement. In addition, a complete set of financial statements includes several pages of notes, containing additional information which accountants believe is useful in the interpretation of the financial statements.
The preparation of financial statements is not the first step in the accounting process, but it is a logical point to begin the study of accounting. Financial statements convey to management and to interested outsiders a concise picture of the profitability and financial position of a business. These statements – each less than a page in length – summarize the thousands or even millions of transactions recorded during the year in the company’s accounting system. Thus, financial statements are the end product of the accounting process.
The student who acquires the clear understanding of the nature and content of these statements is in a better position to appreciate the objectives of the earlier steps of recording and classifying business transactions. Purpose of Financial Statement: The basic purpose of financial statements is to assist users in evaluating the financial position, profitability, and future prospects of a business. In the United States, the annual financial statements of all publicly owned corporations are public information