MEANING AND DEFINITIONS OF FINANCIAL STATEMENTS

Financial Statement are the means by which accounting information of a business concern is
communicated to its users. It is prepared from the data taken from the books of accounts and
conveys an understanding relating to financial affairs of a firm. The statements supply necessary
financial information in a concise form so that the users can understand their meaning and
purpose.

The financial statements generally refer to (i) the Position Statement or Balance Sheet and (ii) the
Income Statement or Profit and Loss Account. Both the statements help the users/ analysts to
analyse the real financial position of an enterprise. They are considered as useful tools in the
hands of the external users viz, trade creditors, investors, employees, customers, Government and
public at large.

DEFINITION:
 In the words of John N. Myer, “the financial statements provide a summary of accounts of a

business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a

certain date and the income statement showing the results of operations during a certain

period.”

 “Financial statement are the end product of financial accounting in a set of financial

statements prepared bythe accountant of a business enterprise ,the result of its recent

activities, and an analysis of what has been done with earning.”- Smith and Asburn

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OBJECTIVES OF FINANCIAL STATEMENTS :-
The significant objectives of financial statements are :
(i) To provide necessary information about the financial activities of the business to
the interested parties.
(ii) To supply information about the efficiency of the management as regards the effective
utilisation of scarce resources.
(iii) To facilitate the management for future financial forecasting.
(iv) To help in evaluation of the earning capacity of the firm along with periodical earnings.
(v) To facilitate in taking decisions regarding replacement of fixed assests and expansion
of the business.

IMPORTANCE OF FINANCIAL STATEMENTS :-

a) Management— The financial statements are very much useful for the management to
decide its future course of action. These statements help to identify the efficient and inefficient
activities by which management exercises various control measures to increase the profitability
as well as productivity.

(b) Creditors — Trade creditors need to be paid within a short period of time. These
payments are made out of the current assets of a concern. Financial statements show the long-
term as well as short-term solvency of an enterprise which the creditors of that concern are
interested to know.

(c) Bankers — Different types of loans are sanctioned by the banks to the business
units. Banks are interested in regular payment of interest and timely payment of installments
of loan. It is through the financial statements, that a banker can know the earning capacity
and financial position of the borrowing organisation.

(d) Investors — The investors who invest their money either in shares or debentures or
in any form of loans need security of their investments. A good and regular return on
their investments attract them to invest more. The investors studythe solvency position of
the business unit from the financial statements.

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(e) Government — Both Central and State Government collect taxes from the business
houses on the basis of information provided in financial statements. Analysis of the financial
statements helps the government in compiling various statistics concerning business and also
facilitates in preparing national accounts and calculating Gross Domestic Product
(GDP), etc.
f) Researchers — Financial statements are the mirror of the financial performance of an
enterprise. Research scholars study the financial operations of different business units and
compare the results of different firms within the industry. They prepare project reports on the
basis of financial statements.

(g) Trade Associations — Trade associatations render various support services to their
member units. For this purpose they analyse the financial statements of different firms and
develop uniform system of accounts.

(h) Stock Exchanges — Shares and debentures (securities) of companies are purchased and

sold through stock exchanges. Price of securities are determined on the basis of financial
position and profit earning of different concerns. Financial statements help stock exchanges in
determining the security prices.

(i) Regulatory Bodies — Various regulatory bodies like Securities Exchange Board of India

Company Law Board, Registrar of Companies (ROC), Pollution Control Broad, etc,
have been formed
to protect the interest of the investors and general public. They put an eye on the financial
statements which show the functioning of a business.

(j) General Public — Common people also take interest to know the profitability and financial

position of a business. A business unit having sound financial position generates employment
oppertunities, supplies goods at reasonable price, uses the local materials and other resources and
helps in social development.

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LIMITATIONS OF FINANCIAL STATEMENTS :-
a) Recording of Monetary Transactions only :
Financial Statements are prepared on the basis of the information compiled and supplied by
accounting which is fully based on monetary transactions only. But there are many important
non-monetary factors which influence the operating results and financial position of the business,
are not considered because they cannot be measured in terms of money.

b) Based on Historical cost :

The assets shown in financial statements are their original cost or historical cost. The value of
some fixed assets might have increased or decreased with the passage of time but are shown at
their purchase price. As Balance Sheet is an index of current economic realities, but does not
consider current prices, loses its significance. Similarly, the profitability shown in Income
Statement may not represent the true picture of earning capacity of the concern. The increase or
decrease in profit of a certain year may be due to some abnormal causes but not due to increase in
efficiency. As a result, the conclusions drawn on the basis of financial statements may not show a
fair picture of the business.

c) No Timely Information :
Usually financial statements are prepared at the end of one accounting year. But the users of
accounting information need those information at aregular time interval for taking right decisions
at right time, which cannot be supplied by the financial statements.

d) Only Interim Reports :

The profit or loss shown in the statement of profit and loss and financial position
revealed in the balance sheet is not the exact picture of a concern rather an interim
report. The true position of a business can only be ascertained when it is liquidated.

e) Effect of Personal Bias :

Financial statements are analysis done on the basis of information contained in themselves.
Human judgement is always involved for its interpretation. The financial information cannot
speak themselves and the analyst provides tongue to those data and make them speak. All the
analysts and users may not see from the same angle and may not have the same opinion in
respect of a particular accounting figur
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f) Use of Alternative Methods :

Several methods are used for the preparation of financial statements of a concern. For example,
depreciation on fixed assets is calculated by following different methods like Straight Line
Method or Written Down Value Method and for valuation of closing stock of materials First in
First out (FIFO) or Last in First out (LIFO) or Average Price method may be used As a result
profitability and financial position of a business for the same period become different with the
application of alternative methods. The application of particular method again depends upon the
personal judgement of the accountant.

g) Application of Conservatism Principle :

On application of the convention of conservatism the statement of profit and loss may not
disclose true income of one business, because probable losses are shown in the statement where
as probable incomes and gains are ignored. This practice leads to understatement of profit which
contradicts the principle of full disclosure.

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TYPES OF FINANCIAL STATEMENTS :
Primarily financial statements consist of three basic components, i.e.,
(a) Statement of Position or, Balance Sheet
(b) Income Statement or, Statement of Profit and Loss
(c) cash flow statement

Balance Sheet :
Balance Sheet is a statement of assets and liabilities of a business unit, normally prepared at the
end of an accounting period. It gives a true and fair idea about the financial position of the
business concern on a particular date. More specifically, balance sheet shows all the properties
(assets) that a business house possesses and the sources of those properties (liabilities and
capital). The right hand side of the statement shows the assets owned by the enterprise and left
hand side shows all the liabilities to the outsiders along with the capital of the concern.
Let us look at a few definitions of balance sheet:
'Balance Sheet is a classified summary of the ledger balances remaining after closing all revenue
items into the Profit and Loss Account".— Cropper
"The Balance Sheet is a statement which reports the values owned by the enterprise

and the claims of the creditors and owners against these properties."— Howard

From the above definitions, it is again clear that, the balance sheet shows the resources that a
business unit has i.e. its assets and from where those resources come from, i.e. its liabilities and
investments by owners and outsiders. The usual practice of preparing a balance sheet by the sole
proprietorship concerns and partnership firms is horizontal form which is having two sides i.e. left
hand side and right hand side. The assets are shown in the right hand side which will be equal to the
liabilities and capital shown in the left hand side. The arrangement of assets and liabilities which
is otherwise known as 'marshalling of assets and liabilities' is either on the basis of (i) liquidity or
(ii) permanence. On the basis of liquidity the most liquid assets like, cash in hand, cash at bank,
short term investments, etc, are shown first and most fixed or permanent assets.

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In the liability side the debts to be paid in a short period like outstanding expenses, bank
overdraft,bills payable, sundrycreditors, etc. are shown first followed by long term liabilities and
capital. When balance sheet is prepared on the basis of permanence, a reverse order of
arrangement is followed. The liquidity form of balance sheet is more suitable for the banking
and other financial institutions while the permanence order is widely adopted by the business
units. Even the Companies Act, 1956 had also adopted the permanence order. But, section 129 of
the Indian Companies Act, 2013 has given a prescribed vertical format of balance sheet to be
prepared as part- I of Schedule Ill. The specific performa is given below:

Statement of Profit and Loss:

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The statement of profit and loss is the summary of all revenue items of one business. It
presents the profitability of the business by summarising the revenues and expenses of a
particular period. This statement is otherwise known as Income Statement or Profit and Loss
Account. When it is prepared in an account form by taking all revenue expenditure and loss
items in the debit side and all revenue incomes and gains in the credit side it is called as profit
and loss account. But when it is prepared in a vertical form (statement form) by taking all those
above mentioned items it is called income statement or statement of profit and loss .In case of
sole-proprietorship and partnership business there is no prescribed form of income statement
and its preparation is not also compulsory rather desirable.
In case of company form of business the preparation and presentation of the statement of profit
and loss is compulsory and should give a true and fair view of the profitability The Indian
Companies Act, 2013 in its section 129 has given a prescribed vertical format of statement of
profit and loss and made its presentation mandatory for all the companies and shall comply with
the requirements of part Il of schedule Ill. The specific performa of this statement along with its
accompanies notes are given below:

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Cash Flow Statement :
Cash plays a singnificant role in the entire economic life of an enterprise, hence it is treated as
life blood of business. Prior to enforcement of the Indian Companies Act, 2013 both Funds Flow
Statement and Cash Flow Statement were prepared as a part of financial statements to see the
changes in financial position of the business. Funds flow statement was prepared to explain the
changes in working capital position and sources of funds and their applications. But it fails to
explain the quantity of inflow and outflow of cash. Many a time profit and loss account may
show a huge profit but it is not possible to pay taxes, dividends, etc. The amount may be lying
as book debts or blocked in inventories. In such a situation profit may be good but cash position
is bad. Keeping in view the importance of cash, Institute of Chartered Accountants of India
(ICAI) issued Accounting Standard—3 (AS-3) Revised which states a listed company has to
prepare its cash flow statement in a prescribed format showing separately cash flow from
operating activities, investing activities and financial activities. Section 2(40) of the Indian
Companies Act, 2013 states that a company other than One Person Company, Small Company
and Dormant Company, has to prepare and present its cash flow statement in a prescribed format
as given in AS-3 (Revised) issued by the ICAI. A Cash Flow Statement is a statement which is
prepared in a prescribed format describing the acquisition of cash from different sources and the
application of the same for different payments throughout the year. It deals with the inflows and
outflows of cash in a business unit between two balance sheet dates . The term cash here means
cash ,demand deposits with banks and cash equivalents. Cash equivalents are highly liquid
investments which can be readily converted in to cash without significant risk of changes in
value and include treasury bills, commercial papers, money market funds, marketable securities,
etc. In this statement all the sources (inflows) of cash receipts and the payments (outflows) are
presented systematically. Cash flow statement helps in preparing a sound financial policy of a
company .
The cash flow statement can be prepared either by direct method or indirect method.
The format of cash flow statement— both Direct and Indirect methods, as
prescribed by the Indian Companies Act, 2013 are given below
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 MAHANADI COALFIELDS LIMITED ( MCL)

Mahanadi Coalfields Limited (MCL) is one of the major coal producing company of India. It is
one of the eight subsidiaries of Coal India Limited . Mahanadi Coalfields Limited was carved out
of South Eastern Coalfields Limited in 1992 with its headquarters at Sambalpur . It has its coal
mines spread across Odisha . It has total seven open cast mines and three underground mines
under its fold.

MCL has two subsidiaries with private companies as a joint venture . The name of these
companies as a joint venture . The name of these companies are MJSJ Coal Limited and MNH
Shakti Ltd. There are 45 sanctioned mining projects in MCL with a capacity of 190.83 Mty of
Coal . The total capital outlay of 45 projects is Rs.6,076.78 crore ( US$760 million) and out of
Which 28 with a total capacity of 73.98 Mty have been completed by 1 st April 2009 with a
sanctioned capital investment of Rs.2348.61 crore ( US$ 290 million). Out of the 28 completed
projects , 2 have been exhausted (Balanda OCP & Basundhara- East OCP ). One expn. Project,
namely , Lajkura Expn. (2.50 Mty, 1.50 Mty incr. ) is going to be approved within a short period
of time .
Approval of Garjanbahal OCP (10.00 Mty) has been stalled temporarily due to delay in getting
Forestry clearance. Seventeen ongoing projects i.e. Kulda OCP (10.00 Mty), Bhubaneswari OCP
(20,00 Mty), Kaniha OCP (10.00 Mty ), Bharatpur Extn.(8.00 Mty ) etc. are under
Implementation.
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BALANCE SHEET OF MCL AS AT 31.03.2022 & 31.03.2021
(Rs.in Crore)

PARTICULARS NOTE 31.03.2022 31.03.2021

NO.
ASSETS
Non current assets:
Property, Plant & Equipment 9938.35 8227.31

Capital work in progress 3244.24 2085.24

Exploration & evaluation assets 101.88 137.79

Intangible assets 6.37 4.84

Intangible assets under development 6.35 -

Financial assets:
a)investments 145.68 766.66

b)loans 1.20 125.79

c)other financial assets 1295.29 1152.95

Deferred tax assets - -

Other non current assets 969.15 604.63

Total Non Currents Assets(A) 15708.50 13105.21

Current Assets
Inventories
988.20 1103.52
Financial assets:
4102.73 3056.03
a)investments
1040.90 1292.63
b)trade receivables
357.11 1010.55
c)cash and cash equivalents
11776.50 7250.00
d)other bank balances
- 500.51
e)loans
707.30 384.38
f)other financial assets

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 2423.02 2628.04
Current tax assets

Other current assets 3286.37 2673.89

Total current assets (B) 24682.13 19899.55
Total Assets ( A+B) 40390.63 33004.76

EQUITIES AND LIABILITIES

Equity:
Equity share capital 661.84 661.84

Other equity 7550.71 4871.20

Equity attributable to equity holders of the company 8212.55 5533.04

Total equity (A) 8212.55 5533.04

Liabilities:
Non current Liabilities:
Financial liabilities:-
a)Borrowings 4.31 5.03

b)Lease liabilities 2.29 -

c)Other financial liabilities 1100.22 366.26

provisions 18764.50 19074.95

deferred tax liabilities 539.46 529.58

other non current liabilities 139.06 152.96

Total non current liabilities (B) 20549.85 20128.78

Current Liabilities:
Financial liabilities:
a)borrowings 0.62 0.64

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b)trade payables 4421.54 3253.38

other current liabilities 6760.85 3636.82

provisions 445.21 452.10

Total current liabilities(C) 11628.23 7342.94

Total equities and liabilities(A+B+C) 40390.63 33004.76

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STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED 31.03.22

PARTICULARS NOTE 31.03.2022 31.03.2021

NO.
Revenue from operations 19165.50 14474.08
other operating revenue 2646.69 2018.25
other income 1184.26 1021.77
1.Total income 22996.44 17514.10
Expenses:
Cost of materials consumed 992.07 705.87
Purchase of stock in trade 103.56 282.34
Changes in inventories 181.53 (294.23)
Employee benefit expenses 3619.70 3187.50
Power expenses 163.27 153.30
Csr expense 181.62 168.44
Repairs 172.21 169.11
Contractual expenses 4528.98 3370.67
Provisions 6.67 63.10
Write off 11.50 -
Other expenses 15729.93 391.21
2.Total expenses 11534.02 8197.31
Profit before share of joint ventures (1-2) 11462.42 9316.79
3.Profit before tax 11462.42 9316.79
4.Tax expense 2981.92 2444.44
Profit after tax( 3-4) 8480.5 6872.35

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STATEMENT OF CASH FLOW

PARTICULARS 31.03.22 31.03.21

CASH FLOW FROM OPERATING ACTIVITIES

Net profit 11462.42 9316.79

Depreciation 723.86 583.40

Dividend income - (0.01)

Finance cost 61.13 68.38

Profit on sale of fixed assets (29.75) (0.17)

Write off 11.42 -

Cash generated from operating activities 15213.49 9158.03

CASH FLOW FROM INVESTING ACTIVITIES:

Purchase of a property (2967.65) (2229.09)

Sale proceeds from property 33.17 1.28

Proceeds in bank deposits (4659.84) 5016.40

Proceeds in mutual funds (354.88) (2740.61)

(7299.46) 1107.45
Net cash from investing activities
CASH FLOW FROM FINANCING ACTIVITIES
(0.73) (1706.26)
Increase in borrowings
Dividend on equity shares (5800.00) (5225.00)
5800.78 6943.03
Net cash from financing activities

(653.43) 939.12
Net increase/(decrease)in cash&cash equivalents

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 CONCLUSION

In conclusion, financial statements are a valuable tool for business owners and investors to

gain a deeper understanding of a company's financial health. By reviewing and evaluating

financial statements, we can make informed decisions that can help ensure the long-term

stability and success of our business. In conclusion, financial statements include the cash flow

statement, balance sheet and income statement of a company . Separately, each statement is

providing a glimpse at the company’s financial situation. With the financial statements combined

determines the company’s financial condition by displaying if the company can manage their

Own incoming and outgoing funds, an estimate of their value, and the expenses and sales revenue

Incurred by them. Financial statements helps investors, bankers, government, management,

Researchers , public etc.. there are some limitations too and they are – historical in nature , it has

many alternatives available for each situation , it records only monetary transactions etc.

It is basically prepared to give information to interested parties, government etc. Financial

Statements determines a company’s health and stability, providing an understanding

of how the company conducts its business . The main purpose of this study is to determine,

forecast and evaluate the best of economic conditions and company’s performance in the future.

The other purpose of this study is to analyze the financial statement and than give information for

financial managers to make through decisions about their business. The financial statement

applies tools, analytical techniques and required methods for business analysis. It is a diagnostic

tool for evaluating financing activities, investment activities and operational activities as well as

an assessment tool for management decisions and other business decisions. The financial

statements helps to point out the areas where the managers have shown better efficiency .
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 BIBLIOGRAPHY
Books Referred : Fundamentals of Management Accounting, NPH- Sarat Kumar Sahoo

Newspapers and Journals Referred :

1. Business Line

2. Economic Line

3. Accounting Today

Websites Referred :

1. en.wikipedia.org

2. www.slideshare.com

3. www.mbacrystalball.com

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