Recent graduates who are aspiring to become Financial Analyst or Finance Manager must have comprehensive understanding of Financial Statements. This 6 part article aims to provide an understanding of Financial Statements through real life examples.

1. How to become a Financial Analyst: Part 1: Components of Financial Statements
Recent graduates who are aspiring to become Financial Analyst or Finance Manager must have
comprehensive understanding of Financial Statements. This 6 part article aims to provide an
understanding of Financial Statements through real life examples. Feedback and queries on this
article can be sent to kaushikr@proschooline.com
The six part article will cover following topics
1. Components of Financial Statement
2. How to make Financial Statements useful?
3. Importance of Financial Statements
4. The Hard and Soft Data in Financial Statements
5. Drawing Inferences from Financial Statements
6. Limitations of Financial Statements
Financial Statements Components and Usage
Financial Statements are typically a set of data that provide a summary of a corporation’s
financial position and status for a particular period. Financial statements essentially serve as a
means of:
(a) understanding the company’s performance during the underlying financial year;
(b) provide an insight into how that compares with the previous years;
(c) serves as a benchmark for inter firm comparison
Components of financial statements and their uses
Financial statements can be categorized into the following sub-classes:
The aspect that records a particular income or an expense – a crude language called a voucher,
that finally finds its place inside a financial statement as an “entry”. A group of similar such
entries pertaining to the same head of account goes as an “account”. For example salary
payments for a month would be grouped under the head salaries month after month. Hence the
year end balance in this account is nothing but the cash outflow on account of salaries. Groups of

2. such accounts are balanced in what is termed as a “Trial Balance”. Trial Balance is a snapshot
of the entries during a particular period.
From the Trial Balance, the heads of accounts are again segregated and taken either to the
profit and loss account or the Balance Sheet. Accounts that trace the happenings during a
particular period are normally taken to the profit and loss account. The other way of defining
entries or accounts that get reflected in the profit and loss account is also events that have
happened and do not have an on-going implication on the business. Accounts that reflect the
happenings as of a particular date are grouped in the Balance Sheet. These would also be
account heads that have either a future revenue earning potential for the business or can have a
liability implication for the business. Cash flows – which is another critical financial statement to
be studied from an analytical view point is a synthesis of the profit and loss account and the
balance sheet and traces the linkages between the two. The schedules to accounts is the
summary of the “accounts” for the accounting period. In summary, financial statements have
the following critical sub-components: Profit and Loss Account; Balance Sheet; Cash
Flow Statement; Schedules. The following sections give a snapshot of these critical sub-
components:

6. In the next part of the article, we will discuss How to make financial Statements useful?
Article written by Kaushik Ramachandran – Director, IMS Proschool
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