Financial Statements and its Importance

What is Financial Statements?

Financial statements provide the useful information for company and other interested parties. In these statements, we can include profit and loss account, profit and loss appropriation account and balance sheet. In USA, company has to make retained earning account instead of making profit and loss appropriation account by following USA GAAP. One more statement whose name is cash flow statement which is made both in India and USA.

a) Profit and Loss Account 

Profit and loss account shows the net profit by comparing revenue with expenses of company. 

Net profit = Revenue - Expenses

Or
Net Loss = Expenses - Revenues

b) Profit and Loss Appropriation Account

Profit and loss appropriation account shows net balance of net profit which will be transferred to balance sheet.

Profit retained by company = Previous profit + Current Net profits - Reserve - Dividends - 

c) Balance Sheet 

This statement shows the liabilities and assets of company. 

Liabilities = Assets 

d) Cash flow statement

This statement is made for financial and cash flow analysis. 

cash flow from operating activity + Cash flow from investing activity + cash flow from financing activity + opening balance of cash book = Closing balance of cash book

Why are these statements made by Companies?

These statements are prepared for following interested groups :

1. Managers and Directors

They can make plannings, policies and take other decisions after seeing above financial statements. 

2. Investors

Investors can take the decision to invest in company after seeing the financial position and performance of company by checking these statements. 

3. Government 

Company can make good tax policy and take tax and fiscal decisions on the basis of these statements.