The financial statements are: 1. Profits and Loss Account 2. Balance Sheet 3. Statement of Changes in Financial Position (SCFP).
Financial Statement # 1. Profits and Loss Account:
Profit and loss account, also known as income Statement, presents the results of operations of a business enterprise for a period of time. This statement shows net profit or net income of an entity for a period of time. Net profit or income is the difference between revenues and expenses.
The profit and loss account indicates how successful a business enterprise has been in achieving its profit goal for a given time span. It also gives the sources and amounts of revenues earned and the different types and amounts of expenses.
Net profit indicates an enterprise’s accomplishments (revenues) in relation to the efforts required (expenses) in pursuing its operating activities. When expenses exceed revenues for a period, a business enterprise incurs a net loss.
Financial Statement # 2. Balance Sheet:
Balance sheet shows the financial position of a business on a certain date. For this reason, it is often called the statement of financial position. Balance sheet indicates the investing and financial activities of a business enterprise at a point of time and shows a firm’s assets, liabilities and equity capital usually at the close of the last day of a month or a year.
Assets are economic resources and provides future benefits to a firm such as cash, inventories, debtors, building, plant, patients, goodwill etc. Liabilities are creditors’ or outsiders, claims on the assets of a business enterprise such as creditors, accounts payables, salaries payable, income tax payable, debentures.
Liabilities include shareholders’ equity as well which are in the forms of ordinary shares, preference shares, retained earnings. Shareholders’ equity is the shareholders’ or owners, claim on the asset of a firm. The shareholders’ claims are only residual, i.e., shareholders have claims against the assets of a company only after all creditors’ claims have been met.
Financial Statement # 3. Statement of Changes in Financial Position (SCFP):
A statement of changes in financial position (SCFP) shows where the financial resources (funds) have come from (sources) and where they have gone (uses). SCFP is generally prepared on working capital basis and cash basis. Working capital-based SCFP explains increase or decrease in working capital for a specified period of time.
(а) Amount of changes in working capital associated with the operating activities of a firm.
(b) Long-term financing or other sources that cause an increase in the working capital.
(c) Long-term investment activities or other uses that cause a reduction in the working capital.
Cash basis SCFP, popularly known as cash flow statement, summarizes the flow of cash in and out of the firm over a period of time. It focuses on various items which bring out changes in the cash balance between two balance sheet dates.
Cash flow statement covers all items which increase of decrease the cash of a business enterprise. Both in India and USA, statement of cash flows is legally required to be prepared by companies along-with Income Statement and Balance Sheet. In India cash flow statement is mandatory as per AS-3.
Among the above statements, balance sheet is considered a status or stock report and the other two statements—Income Statement and Statement of Changes in Financial Position—are known as flow reports. Balance sheets, as stocks reports, show the information about the resources of an organisation at a specified moment of time.
The income statement and statement of changes in financial position (working capital and cash basis), as the flows reports, show the activities of the enterprises for a period of time, say for a year, half-year, or a quarter. Fig. 1.3 summarizes the information provided by the financial statements.