Basics of
the Financial Statements
& its Components
Financial Statements are
primary and the single most
important source of information
needed to make sound business
decisions.statements are;
Financial
• Standalone/ individual
financial statements
• Consolidated financial
statements
Financial statements make it
easier to understand the
earnings and expenditure as well
as the assets, liabilities and
equity position of a business
establishment.
The Components of a
financial statements are …
Main components
o Statement of Financial Position (Balance
Sheet)
o Statement of Profit & loss (Income
Statement)
Other
o Components
Statement of Cash flows
o Statement of Changes in Equity
o Accounting Policies
o Explanatory Notes
1
Statement
. of Financial Position
(Balance Sheet)
Statement of Financial Position
helps in keeping track of an
individual’s or business entity’s
financial strength
as at specific date.
Assets
Liabilities & Equity
Assets
Liabilities Shareholders’ Equity
Long Long / Short term Long / Short term Equity Retained Other
term assets liabilities shares Earnings reserves
Fixed assets Financial Other Financial Other
(PPE) Assets Assets liabilities liabilities
Assets: Represents Liabilities: Represents confirmed obligations
Fixed/PPE /Other assets. that an entity is liable to pay as at the
Fixed assets remain particular date. Liabilities arise from legal
constant for a long time obligation and/or constructive obligation E.g.
e.g. buildings, land, Borrowings, Trade Payables, Legal dues, Legal
Machinery used in obligation, etc. Obligations which are not
production/service. confirmed are disclosed in note as contingent
Current assets are liabilities.
cash/other assets
convertible in cash e.g. Equity: Equity represents contribution by
inventory, receivables, etc. owners and profits and other gains available
2
Statement
. of Profit and Loss
Statement of Profit and Loss
gives a complete summary of
Operations carried out by the
entity
during the specific period.
Key items of Statement of Profit
and Loss are:
o Revenue
Revenue from Operations
Other income (Non operating)
o Expenses
Expenses related to sales
Depreciation & amortization
Finance costs
o Profit before tax
o Tax Expenses
o Profit after tax
Revenue
The money that comes into a company
because of its business and other
activities during a particular period is
Revenue;
o Revenue from operations E.g. Sales,
Services, Rebates, etc. generated from
core activities.
o Other income (non-operating) E.g.
Interest income, gain on investments, etc.
generated from non core activities
Expenses
The costs incurred by a company in order to
earn revenue and other activities.
o Expenses related to sales e.g. Material costs,
Production costs, etc. are direct costs
o Depreciation & amortization represents
systematic allocation of the cost of assets over
its useful life
o Finance costs e.g. interest, processing fees,
mediation fees, etc. incurred to secure / service
the finance
o Tax expenses represents tax payments on the
3
.
Statements of Cash Flows
Statement of Cash Flows
reports cash generation from
and used in various activities
undertaken by an entity during
the period.
Components of Statement of
Cash Flows are..
o Cash Flows from Operating
Activities
o Cash Flows from Investing
Activities
o Cash Flows from Financing
Activities
Cash Flows From Operating
Activities
Operating are main activities of the entities
E.g. the production of goods, sales, delivery
of the finished goods, provision of services,
Leasing, etc.
Cash Flows From Investing
Activities
These include cash flows from assets
purchase, gains and losses from
investments, income from investments and
other transactions of the company
Cash Flows from Financing
Activities
The cash flows form financing activities
refer to the flow of cash between a business
and its owners and creditors. Cash flows
from financing activities are proceeds from
issue of share capital, payment of dividends,
borrowings, fees for arranging finance,
repayments of loans, payment for debts
servicing, etc.
Other Components of the financial
statements
o Statement of Changes in Equity presents
transactions with owners e.g. issue of equity,
dividend distribution, issue bonus shares, etc.
o Accounting Policies is set of rules basis which
the financial statements are prepared. These
policies are basis generally accepted account
principles (GAAPs) and legal requirements
o Explanatory note explains various aspects of the
financial statements in detail, and provide
Each and every aspect of the financial
statement is important and provides
valuable insights into the working of the
company.
» Essar Oil & Gas
Exploration & Production
Limited
Financial Statements
Unknown
Activity – 1
Q & A Session
Q: Balance sheet is also known as:
Statement of Financial Position
Statement of Operations
Statement of finance
Statement of operational position
Q: Which report gives a review on
the profitability of a business?
Statement Changes in Equity
Cash flow Statement
Balance Sheet
Income Statement
Q: Count of Employees are
recorded in of balance sheet as?
Assets
Liabilities
Both of the above
None of the above
Q: The statement of Financial
Position gives the information
about
Net-worth, Assets & Liabilities
Gains & Losses
Cash & non-cash transactions
Dividend paid & received
Q: Net-assets are shown in
Balance Sheet as:
Debt
Equity
Liabilities
Assets
Q: Profit & Loss Statement is also
known as:
Statement of Revenue
Statement of Balance Sheet
Statement of Operations
Statement of Income
Q: Is Cash & Bank balance a
Liability?
Yes
No
Q: Which items are labelled as
non-physical assets:
Property
Brand Value
Equipment
Off-shore Assets
Q: Which of the following options
is not recorded in the Balance
sheet?
Cash
Rent Expenses
Building
Borrowings & Loans
Q: Inventories are classified in
Balance Sheet as;
Assets
Liabilities (if unable to sale the
same)
Both of the above
None of the above
Q: The money that a Company
owes other than to its owners is
called:
Liabilities
Assets
Inventory
Expenses
Q: Cash paid towards
procurement of raw-materials is
part of;
Cash flows from operating activities
Cash flows from financing activities
Cash flows from investing activities
Not a part of cash flow
Activity – 2
Check your own Net-Worth
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