Introduction to Financial Statements

Introduction

Accounting consists of recording business transactions and then presenting the information. Every transaction has two financial effects, and this is referred to as double entry bookkeeping. The trial balance is then produced in order to produce the statement of financial position and statement of income.

Did you know: Luca Pacioli is one of the originators of the Double entry bookkeeping method.

 Financial Information

Financial statements presents a great deal of information both financial and non-financial information. Financial statements are important because the financial information they provide can entice investors into investing in the company where the results are good. Besides this, users of financial statements in particular shareholders and creditors will use this information to assess the financial performance of the company.

The set of financial statements comprises of:

  1. Statement of financial position
  2. Income Statement
  3. Statement of changes in equity
  4. Cash flow statement
  5. Notes- Summary of accounting policies and other explanatory notes.

Presentation of financial statements

Accounting standard provide guidance on how financial statements should be presented and the principles that should be applied. The financial standard focuses on:

  • The statement of financial position
  • The statement of comprehensive income
  • Cash flow Statement

For example, an accounting policy could be selecting straight line depreciation rather than the reducing balance method.

How information should be disclosed

Some items need to be presented on the face of statements of financial position and comprehensive income.

  • Other items can be displayed in the notes of financial statements.
  • Recommended formats are also provided which companies can decide to follow.

The identification of financial statements

The users of financial statements should be able to distinguish between the financial statements and other published information. The following should be presented:

  1. Name of company reporting information
  2. State whether accounts are for a company or a group of companies
  3. The date of the end of the reporting period
  4. Presentation of currency
  5. The level of rounding in amounts presented in financial statement

Reporting periods

Financial statements are normally presented annually but the IAS 1 requires a financial statement to be produced at least once a year. If a company prepares financial statements less than a year or more, then the reason for this should be disclosed.

Did you know: Most companies produce financial statements every year (Equivalent to 52 weeks).

Timeliness

All financial statements have to be produced within six months of the end of the reporting period this is because as time goes on the usefulness of the reports reduces.