Financial statements and reports present the position of a firm in terms of monetary value at a particular point in time. The types of financial statements that business firms prepare and punish periodically are an income statement and a balance sheet. Besides, there are other special types of statements such as a statement of retained earnings, a statement of changes in financial position, and a statement of sources and use of funds.
The balance sheet and income statement are the traditional basic financial statements and reports of a corporation. These two important statements are prepared monthly, quarterly, and/or annually as required by the law or according to business practice. Periodical examination of such statements is very important to verify the actual state of the company and provide a valid set of accounting data for decision making. The analysis of such statements reveals the true state of operation and the financial results on relevant terms.
The Balance Sheet
The Balance Sheet represents a summary statement of the firm’s financial position at a given point in time. The statement balances the firm’s assets (what it owns) against its financing which can be either debt (what it owes) or equity (what was provided by owners). It is the most significant financial statement indicating the financial position or condition or the state of affairs of a business at a particular moment of time.
The balance sheet consists of data about resources and obligations or duties of a business entity and about its owners, interests in the business at a particular point in time. A specimen of the balance sheet is as follows;
As of December 31, 2018
|Assets||Liabilities and Equity|
|Current Assets:||Current Liabilities:|
|Marketable Securities||Accrued Expenses|
|Inventory||Short Term Notes Payable|
|Fixed Assets:||Taxes Due|
|Building||Long Term Liabilities:|
|Machinery||Bonds Other Long Term Debts|
|Other Fixed Assets||Shareholders’ Equity:|
|Common Stocks Retained Earnings|
The balance sheet presents total assets, total liability, and total equity. It is prepared showing all assets on one side and all liabilities and equity on the other side.
Under American practice, the assets are listed on the left-hand side and all liabilities and equity on the other hand side, whereas under the British convention assets are shown on the right-hand side and the capital on the left-hand side.
The balance sheet may be viewed in five parts-two parts in the assets side as current assets and fixed assets and three parts in the liability and equity side as current liabilities, long term liabilities, and owner’s equity.
The Income Statement
The income statement provides a financial summary of the firm’s operating results during a specific period. Most common are income statement covering a 1-year period ending at a specific date, ordinarily of the calendar year. Income statement represents the whole summary of all the revenue and expenses of the corporation for a specific period of time.
The usual format of this statement is to first list all revenue from sales, commission, and fees, and other sources in the upper part, then to list all expenditures including depreciation in the second part. Finally, the total of the second part is subtracted from the total of the first part showing the balance as taxable income. The tax liability is then subtracted from the taxable income to arrive as the net income after tax. The specimen of a typical income statement is presented below;
For the year ending December 31, 2018
|Revenue from sales||xxxxx|
|Less: Cost of Goods Sold (COGS)||xxxxx|
|Non-Operating Expenses||xxxx xxxx|
|Less: Tax Liability||xxx|
|Net Income After Tax||xx|
The balance sheet and the income statement are major financial statements and reports of a corporation. The type of financial statements that business firms prepare and publish periodically.
The Relationship between Accounting, Auditing, and Financial Analysis
In general, the task of preparing, examining, and analyzing financial statements are carried out by different parties. These jibs are carried out in the order of preparation (accounting), examination (auditing), analysis of statements, and application of findings, making a sequential relationship among the parties who perform these jobs.
Accountants keep the records of actual business transactions and prepare the financial statements periodically using the actual data. Upon completion of financial statements, auditors examine them and make sure that figures are correct, properly represented and the real financial position of the firm is reflected in the statements.
Then the job of financial analysts started and it is to analyze such audited statements to see if the results meet the objective of the firm, to identify problems, if any in the past, or present and/or likely to be in the future and to provide recommendations to solve identified problems.
Thus, the job of an auditor is started upon completion by accountants, and the duty of financial analysts started upon the completion of the auditor. This shows the sequential relationships among accountants, auditors, and financial analysts.
Pradhan, S. (1992). Basis of Financial Management. Kathmandu: Educational Enterprise (P) Ltd.