Refer to study the financial statement in finance specialization.

1. CHAPTER 1: FINANCIAL STATEMENTS
OF CORPORATE ORGANISATION
BY: MRS.RUPALI KADU
Analysis of financial
statements

2. Meaning of financial statement :
Financial statements are also called as “Financial Reports”.
A financial report is a summary report that shows how a firm
has used the funds entrusted to it by its shareholders &
lenders & what is its current financial position. The three
basic financial statements are
1. Balance sheet which shows a firm’s assets, liabilities, net
worth.
2. Income statement ( also called profit & loss a/c)
3. Cash flow statement ( cash inflow & outflow

3. Need & importance of financial statements:
1. Importance to Management:
The management team requires up to date, accurate and systematic
financial information for the purposes. Financial statements help
the management to understand the position, progress and prospects
of business . A comparative analysis of financial statements reveals
the trend in the progress and position of enterprise and enables the
management to make suitable changes in the policies to avert
unfavourable situations.
2. Importance to the Shareholders:
Management is separated from ownership in the case of companies.
Shareholders cannot, directly, take part in the day-to-day activities
of business. However, the results of these activities should be
reported to shareholders at the annual general body meeting in the
form of financial statements.

4. 3. Importance to Lenders/Creditors:
The financial statements serve as a useful guide for the present and
future suppliers and probable lenders of a company.
It is through a critical examination of the financial statements that
these groups can come to know about the liquidity, profitability and
long-term solvency position of a company. This would help them to
decide about their future course of action.
4. Importance to Labour:
Workers are entitled to bonus depending upon the size of profit as
disclosed by audited profit and loss account. Thus, P & L a/c
becomes greatly important to the workers. In wages negotiations
also, the size of profits and profitability achieved are greatly
relevant.

5. 5. Importance to the Public:
Business is a social entity. Various groups of society, though
directly not connected with business, are interested in knowing
the position, progress and prospects of a business enterprise.
They are financial analysts, lawyers, trade associations, trade
unions, financial press, research scholars and teachers, etc. It is
only through these published financial statements these people
can analyze, judge and comment upon business enterprise.
6. Importance to National Economy:
The rise and growth of corporate sector, to a great extent,
influence the economic progress of a country. Unscrupulous and
fraudulent corporate managements shatter the confidence of the
general public in joint stock companies, which is essential for
economic progress and retard the economic growth of the
country.

6. Conventions followed in the preparation of financial statement:
Accounting conventions were established with a motive to bring uniformity
in the books of accounts at the time of preparing them. Conventions are like
customs/traditions that help the accountant to communicate clear
accounting picture. In other words, accounting convention sets the guideline
for the accountant that in turn helps him/her to prepare accounting
statements and reports.
1. Conservation: As per the Conservatism convention at the time of
recording any financial transaction, you should recognize no profit but
provide for all possible losses. This is the most important convention as
it depends upon the theory that the future is uncertain. For instance, the
value of inventory is recorded at cost or market price whichever is less.
In a similar way, the provision for doubtful debts is also created.
However, conservatism impacts current assets and liabilities.

7. 2. Consistency:
According to the convention of consistency once the company has decided to
follow a method of accounting then it shall consistently follow the same
method throughout. Along with this, changing the accounting method often
would make the comparison of its own financial statements of different
period difficult for the company.
3.Disclosure :
Full disclosure convention helps the user in the proper interpretation of the
financial statements of the company. As per this convention at the time of
preparing records, full disclosure of financial information shall be made by the
accountant.
Full disclosure can be made in two ways:
Either in the body of the financial statements, or
In notes accompanying such financial statements