Having understood how a company raises its
capital, we have to learn the nature, objectives
and types of financial statements it has to prepare
including their contents, format, uses and
limitations. The financial statements are the end
products of accounting process. They are prepared
following the consistent accounting concepts,
principles, procedures and also the legal
environment in which the business organisations
operate. These statements are the outcome of the
summarising process of accounting and are,
therefore, the sources of information on the basis of
which conclusions are drawn about the profitability
and the financial position of a company. Hence, they
need to be arranged in a proper form with suitable
contents so that the shareholders and other users
of financial statements can easily understand and
use them in their economic decisions in a meaningful
way.
3.1 Meaning of Financial Statements
Financial statements are the basic and formal annual
reports through which the corporate management
communicates financial information to its owners
and various other external parties which include–
investors, tax authorities, government, employees,
etc. These normally refer to (a) the balance sheet
(position statement) as at the end of accounting
period, and (b) the profit and loss account (income
statement) of a company. Now a days, the cash flow
statement is also taken as an integral component of
the financial statements of a company.
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• Explain the nature and
objectives of financial
statements of a
company;
• Describe the form and
content of income
statement of a
company;
• Describe the form and
content of balance sheet
of a company;
• Explain the significance
and limitations of
financial statements;
and
• Prepare the financial
statements.
Financial Statements of a Company
3
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Accountancy : Company Accounts and Analysis of Financial Statements
Box 1
In the words of John N. Myer, “The Financial statements provide a summary of
accounts of