Scribd
Upload
10 views

E-Content: Nature of Financial Statements

The document discusses the meaning and nature of financial statements. It explains that financial statements are essential documents that convey financial information about a business using accounting principles and assumptions. The document also outlines key qualities financial statements should possess including understandability, relevance, reliability, comparability, completeness and timeliness.

Uploaded by

Care Tutorial
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
10 views

E-Content: Nature of Financial Statements

The document discusses the meaning and nature of financial statements. It explains that financial statements are essential documents that convey financial information about a business using accounting principles and assumptions. The document also outlines key qualities financial statements should possess including understandability, relevance, reliability, comparability, completeness and timeliness.

Uploaded by

Care Tutorial
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

E-Content

Introduction

Financial Analysis is defined as being the process of identifying financial strength and weakness of a business by
establishing relationship between the elements of balance sheet and income statement. The information pertaining to
the financial statements is of great importance through which interpretation and analysis is made. It is through the
process of financial analysis that the key performance indicators, such as, liquidity solvency, profitability as well as the
efficiency of operations of a business entity may be ascertained, while short term and long term prospects of a
business may be evaluated. Thus, identifying the weakness, the intent is to arrive at recommendations as well as
forecasts for the future of a business entity.

Meaning of Financial Statements

Financial statements are the essential documents of business. They are the outputs of financial accounting. They are
the final products of the accounting process. They are statements containing financial information of a business
enterprise. They convey certain message to feel financial pulse of an organization. The basic purpose of preparing
financial statements is to convey information about financial position of the enterprise to owners, creditors and the
investors.

Nature of Financial Statements

The following characteristics of financial statements indicate their nature:

1. Recorded Facts - The term recorded facts refers to the data drawn from accounting records. Only those facts which
have been recorded in the books are shown in the financial statements.

2. Accounting Principles - In the preparation of financial statements, certain accounting principles, concepts and
conventions are followed. For example: The principle of cost price or market price whichever is less is followed for
valuation of stock.

3. Assumptions - Business transactions are recorded on certain assumptions. For example: In preparing financial
statements, the accountants make many assumptions like that the value of money remains constant, going concern
concept etc.

4. Personal Judgment - The financial statements are affected by the personal judgment of accountants. For example:
The method of stock valuation, method of depreciation etc. depend on the personal judgment of the accountant. The
accountant can select one of the available methods of stock valuation, depreciation etc.

Essentials of Financial Statements

The financial statements should possess the following essential qualities:

1. Understandability - Financial statements should be easily understandable by users. For this, the information
contained in these statements should be clear and simple.

2. Relevance - The financial statements must contain only relevant information. Then only the users can evaluate
past, present and future events and can take wise decisions.
3. Reliability and Accuracy - Financial statement should disclose information in such a way that the users can
compare the current year’s progress with that of previous year. Users must also be able to compare the financial
performance of reporting Enterprise with that of other companies.

4. Comparability - Financial statements should disclose information in such a way that the users can compare the
current year’s progress with that of previous year. Users must also be able to compare the financial performance of
reporting Enterprise with that of other companies.

5. Completeness - The information contained in the financial statements should be complete in all respects. This
means all information should be shown in these statements. It further means that the information shown in the
financial statements should not mislead creditors, investors and other users.

6. Timeliness - The financial statements should be prepared within a reasonable time after the accounting period is
over. If the statements are not prepared and presented in time, they cannot be properly used. Besides, the firm cannot
formulate plans for future.

You might also like