Financial Statement/Reporting assignment, Subject: Accounting

1. Financial Statement/Reporting
Definition: A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity
Importance: At regularperiodpubliccompaniesmustprepare documentscalledfinancial statements.Financial statementsshowthe financial performance of an
company.Theyare usedfor both internal-, and external purposes. When they are used internally, the management and sometimes the employees use it for
their own information. Managers use it to plan ahead and set goals for upcoming periods. When they use the financial statements that were published, the
management can compare them with their internally used financial statements. They can also use their own and other enterprises’ financial statements for
comparison with macro economical data’s and forecasts, as well as to the market and industry in which they operate in.
How can financial reporting play an important role to exhibitfinancial positionofa business?
Financial reportingreferstothe periodicproductionof businessfinancial statements. These financial statementsinclude the balance sheet, income statement,
and cash flow statement.
The balance sheet shows a moment in time snapshot of a company’s financial health.
 Can this company take on additional debt or is it already overleveraged?
 Can it meet its current obligations with cash and other current assets that can be converted into cash?
The income statement measures company performance in terms of sales and profitability.
 Has this company maintained or improved its sales and profit margins compared to prior years?
 If not, what has caused them to decline?
The cash flow statement shows how a company generates cash flow and how it spends its cash.
 Is cash flowaftercore operationssufficienttomeetall debtobligationsandstill leaveexcesscashtoreinvestincapital assetslike vehicles, machinery &
equipment?

2. Without accurate financial reporting, any answers to these questions would be guesses at best. Management would have no idea of how profitable, how
leveraged, how liquid, nor how efficient their business is. They could not determine if their business could
 whetherbearanothereconomicrecessionlike the one we are still experiencing,
 whethertheyare growingtheirbusinessanddoingsoprofitably,
 or if theyhave the capacity to meetall currentobligationsforpayroll,utilities,andloanobligations,withoutrunningoutof cash.
Accurate financial reportingisalsoone waya small business owner can have a control mechanism by which any irregularities (expense abuses, pricing issues,
etc.) in the financial performance of the company can be brought to the forefront. Essentially, a business without financial reporting is the equivalent of a
rowboat heading upstream without any paddles, not likely to move forward, and most likely to go backward.
Balance Sheet
Definition:A statementof the assets,liabilities,andcapital of a businessorotherorganizationataparticularpoint in time, detailing the balance of income and
expenditure over the preceding period
OR
A financial statementthatsummarizesacompany'sassets,liabilities and shareholder’s equity at a specific point in time. These three balance sheet segments
give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity
Importance: The Balance Sheetforaccountingis an extremelyimportantandoftenusedstatementof entitycondition. It shows the extent of entity ownership
of assets,liability and equity at a given point in time. This point is the date on the statement. It is a physical representation of the 'accounting equation.' The
equationstatesthatat any pointintime,the assetsof the businessare equal tothe sumof the liabilities and owner's equity. The equation also forms the basis
of the statementstructure,whichmirrorsthe three aspectsof the equation.The three partsare:1) assets, 2) liabilities and 3) owner's equity. Let's look at each
one.

3. Assetsare anything that the business owns. We tend to consider assets to be land, buildings, vehicles, inventory and cash but they are also other things. The
addingmachines,computers,copyrights,patents,goodwill,timeclocks,pens,wrenches,ladders, paper and copy machines are also included. This expands the
definition to encompass all that the business has acquired by purchase or by owner contributions.
Liabilities - whendoingaccounting - onthe otherhand,are claimsagainstthe assets excluding the owner's equity contributions. These claims can take several
forms.Some are both short- and long-termloans, billsforutilities,rent,employee expenses,bonds,taxesandmany other items. They reduce the total value of
the assets. Interestingly, liabilities are very liquid. They change on a constant basis. For instance, widgets are purchased to sell, the business uses utilities to
operate and cash or credit is needed to pay these outside demands.
Finally,there isthe Owner'sEquitysectionof the Balance Sheet.Thissummarizes, in varying degrees of detail, who owns the business. For instance, if stock is
issued, it will show what the stock is valued at and usually how many shares are outstanding. It is not unusual to see differing issues of stock and wide
differencesinthe values.Insimple businesses,the equitymightjustbe dividedbetweenseveralpartners.Though,the Balance Sheet probably won't reveal the
namesof the partnersandhow muchof the businesseachone owns. The ownership is usually specified in other documents related to the corporate records.
But, this section will show an aggregate of the amounts.
The other importantpartsof the Owner'sEquity,inaccounting,are relatedtothe Income Statement.The NetIncome,or Net Loss, is part of the equity portion.
Typicallythere are twoparts toit representingthe previousretainedearningsof the entityandanotherpart,whichrepresentspresent earnings. Together, they
showhowmuch the value of the businesshasincreased,ordecreasedbecause of entity operations. If the business is operating at a loss, the Owner's Equity is
becominglessvaluable andwill showthatthe ownersnowhave lessequitythattheyhadpreviously.If lossconditioncontinues,the business eventually ceases.
The Balance Sheet is an extremely important statement in the accounting and will be found, sometimes several ways, in the company prospectus. It is also
provided to various government regulatory agencies. They use them to assure the business is complying with laws, regulations and taxing requirements.
Typically,there isan outside audit of this statement along with the Income and Cash Flow statements too. This provides an outside review and an opinion of
how well the business is keeping their books. So, the Balance Sheet is an extremely important financial document.

5. Income statement/ Statement of Profit & Loss
Financial statementthatmeasuresacompany'sfinancial performance overaspecificaccountingperiod.Financial performance is assessed by giving a summary
of howthe businessincursits revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a
specific accounting period, typically over a fiscal quarter or year.
Also known as the "profit and loss statement" or "Statement of revenue and expense".
Explanation ofIncome Statement/ Statement of Profit and Loss: The income statement is the one of the three major financial statements. The other two are
the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections.
The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information
aboutrevenuesandexpensesthatare a directresultof the regularbusinessoperations.Forexample,if abusinesscreatessportsequipment,thenthe operating
items section would talk about the revenues and expenses involved with the production of sports equipment.
The non-operatingitemssection discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For
example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section.
Importance: The Income Statementshowsthe revenuesandexpensesforabusiness.Itisusuallypreparedmonthly but can cover any time period up to twelve
months. In evaluating the success of a business the income statement shows if the revenues are greater than the expenses (in the black or profit) or if the
expenses are greater than the revenue (in the red or loss).
The Income Statement can be prepared on a cash basis, accrual basis or an income tax basis. It is important to understand the basis for preparation. It is not
unusual for an income statement to show a profit using one method and a loss using another method.
Whenevaluatingthe successof abusinesseventhoughyoucanlearna greatdeal from the income statementitisessentialtoalsoreviewthe balance sheet and
statement of cash flows to get a complete picture of the business.
One of the Example isgivenbelow:

7. Statement of Owner’s Equity / Statement of retained earning
The Statementof Owner's Equityshowsthe change inowner'sequityduringagiventime period.Itliststhe ownerequitybalance atthe beginningof the period,
additionsandsubtractionstothe balance,andthe endingbalance.Additionscome fromownerinvestments and income; subtractions from owner withdrawals
and losses.
OR
Financial Statement showing the beginning balance, additions to and deductions from, and the ending balance of the shareholder’s equity account, for a
specified period. Also called statement of shareholder’s equity.
OR
The Statement of Owner’s Equity reflects the changes in the owner’s equity of the company for a specified period of time, and is also typically done by the
businessonamonthlybasis.Itis calculatedusingthe followingformula:Owner’s equitybeginningof month+ investments+netincome - withdrawals=owner’s
equity end of month.
The importance of the Statement of Owner’s Equity is to show the change in equity. It can explain where money came from and where money went in the
business.
The example of “statement of owner’s equity/ Statement of retained earning” is given on next page:

9. Depreciation
A reduction in the value of an asset with the passage of time, due in particular to wear and tear
OR
To record the physical decrease in the value of fixed asset is called depreciation.
OR
Depreciation is a non-cash expense that reduces the value of an asset over time.
Assetsdepreciate fortworeasons:
 Wear and tear. For example, an auto will decrease in value because of the mileage, wear on tires, and other factors related to the use of the vehicle.
 Obsolescence.Assetsalsodecrease invalue astheyare replacedbynewer models. Last year's car model is less valuable because there is a newer model in
the marketplace.
Methodsto calculate depreciation:
Straightline depreciationmethod: A methodof computingdepreciationbydividingthe differencebetweenanasset'scostand itsexpectedsalvage value by the
number of years it is expected to be used.
 The original cost of the asset, including costs of acquiring the asset, transporting it, and setting it up
 Less the salvage value (the "scrap" value)
 Divided over the years of useful life of the asset.
For example, the annual depreciation on a machine with a useful life of 20 years,
a salvage value of Rs.1000
and a cost of Rs.50,000 is Rs.2450 how? It’s calculated below:
Rs.50,000-1000= Rs.49,000
Then Rs.49,000/20= Rs.2450.

10. References/Source:
1. http://answers.yahoo.com/question/index?qid=20080526192714AANZUfi
2. http://www.horizoncommunitybank.com/download/HCB-NEWSLETTER-0512.pdf
3. http://csanad.hubpages.com/hub/The-Importance-of-financial-statements
4. http://ezinearticles.com/?The-Importance-of-the-Balance-Sheet-as-a-Financial&id=513212
5. http://www.investopedia.com/terms/i/incomestatement.asp#axzz26R1IxX2q
6. http://answers.yahoo.com/question/index?qid=20110122114712AAOmJBB
7. http://www.businessdictionary.com/definition/statement-of-owners-equity.html
8. http://accountingaide.com/examples/stmtownereq.htm
9. http://suite101.com/article/understanding-financial-statements---a-brief-ove-a210432
10. http://www.investopedia.com/terms/d/depreciation.asp#axzz26R1IxX2q
11. http://biztaxlaw.about.com/od/glossaryd/g/depreciation.htm