FINANCIAL

STATEMENT
AND THE
ELEMENT
P R ES ENT ED BY LUTHFA ZA HRO
W H AT ARE FIN AN C IA L STATEME N T
the i m p o r t a n t reports of the entity t h a t p r o v i d e the entity’s f i n a n c i a l
i n f o r m a t i o n a t t he specific p e r i o d of t i m e to b e used b y m a n y
stakeholders s uc h m a n a g e m e n t s , employees, the b o a r d of directors
investors, shareholders, customers, suppliers, bankers, a n d other
relate stakeholders . These s t a t e m e n t s are p r e p a r e d as the
r e q u i r e m e n t of m a n a g e m e n t , owners, shareholders, gov ernments , a n d
other r e l a t ed a u t h o r i t y organization.

Financial s t a t e m e n t s are the m a i n source of f i n a n c i a l i n f o r m a t i o n for

m o s t decision makers. That is w h y f i n a n c i a l
a c c o u n t i n g a n d r ep o r t i n g p l a c es s uc h a h i g h e m p h a s i s on the
ac c u r ac y, reliability, a n d relevance of the i n f o r m a t i o n on these
f i n a n c i a l s t a t e me nt s .
 W H Y IS A FIN AN C IA L STATEME N T
I M P O RTAN T?
it is the c o m p l e t e r epor t on the h e a l t h of the business t a k i n g in c a s h flow, i n c o m e
a n d the b a l a n c e sheet. The f i n a n c i a l s t a t e m e n t d e t e r m i n e s if a business has to
a b i l i t y to r e p a y loans, if it has the c a s h flow to m e e t bills a n d p u r c h a s e stock. It
will also tell f r o m where the business is g e n e r a t i n g c a s h a n d where the c a s h
goes.The f i n a n c i a l s t a t e m e n t tells if the business is profitable, if it will s t a y
p r o f i t a b l e a n d if there are a n y l a r g e p r o b l e m s looming, s uc h as a c o n t i n u o u s d r o p
in sales over time. Reading the f i n a n c i a l s t a t e m e n t will give a n overall view of the
c o n d i t i o n of the business a n d if there are a n y w a r n i n g s signs of possible future
pr oblems. A b a n k or other s uc h institution will look to the f i n a n c i a l s t a t e m e n t as
the first i n d i c a t o r of h o w the business is p e r f o r m i n g a n d if there is a n e e d for
further investigation.
W H EN W ILL A C O MP AN Y PREPARE
A FIN AN C IA L STATEME N T?
Every business will ready a financial statement to go with their end of year
results, to give interested parties the overview of how the business is
functioning. If a business is looking to increase credit facilities with a bank or
trying to raise capital for a n expansion, it will produce a financial statement for
the end of a fiscal quarter or the most recent month. When preparing a
financial statement for such purposes the best practice is to use general
accountancy language, understood by all parties.

A financial statement that m a y a c c o m p a n y a n end of year report a n d read just

by employees, is often in terms familiar to just those involved.Often a
government body m a y request a financial statement for tax purposes a n d the
c o m p a n y will need to produce one of high quality using generally accepted
guidelines. A bank or investors m a y also request a financial statement without
warning, if they are concerned about the profitability or otherwise of the
company. For these reason alone it is vital for any business to keep good a n d
current records so that a financial statement is easy a n d quick to produce.
Qualitativ e c h a r a c t e r i s t i c s of f i n a n c i a l s t a t e m e n t s
U N D ERSTAN DABILIT Y
The financial statements are published to address the shareholders of the company. So it is
important that these statements must be prepared in such a way that is easy to understand a n d
interpret for the shareholders. The information provided in these statements must be clear a n d
legible. For the sake of understandability, the m a n a g e m e n t must consider not only the statutory d a t a
a n d information but also the voluntary information disclosures which would make financial
statements easier to understand. The directors must elaborate the information provided in the
statements where necessary

RELEV AN C E
The information provided in the financial statements must be relevant to the needs of its users.
Although the main statutory recipients of these statements are ‘shareholders’, but there are m a n y
other stakeholders that rely on these statements during their decision making process e.g. Fund
Providing Institutions (Banks, Insurance Companies, Assets Funding Firms etc.), potential investors
( f o r making investments in prospective companies), suppliers ( f o r the assessment of credit rating)
etc. So the information provided in these financial statements must be relevant to the ‘information
needs’ of all these stakeholders, which could affect their economic decisions.
Qualitativ e c h a r a c t e r i s t i c s of f i n a n c i a l s t a t e m e n t s
RELIA BILIT Y
The information provided in the financial statements must be reliable a n d true. The information
extracted to prepare these financial statements must be from reliable a n d trustworthy
sources. The financial statements must depict the true a n d fair picture of the status of the c o m p a n y
affairs. This m e ans that the information provided must not have any significant errors or material
misstatements. The transactions shown must be based on the concepts of prudence a n d must
represent the true nature of company’s transactions a n d operations. The areas that are judgmental
a n d subjective in nature must be presented with due care a n d keen c o m p e t e n c e

C O MP ARABILIT Y
The financial statements must be prepared in such a way that they are comparable with prior year
financial statements. This characteristic of financial statements is very important to maintain, as
it makes sure that the performance of the c o m p a n y could be monitored and compared. This
characteristic is maintained by adopting accounting policies and standards that are applied are
consistent from period to period and between different jurisdictions. This enables the users of the
financial statements to identify and plot trends and patterns in the d a t a provided, which makes their
decision making easier
Qualitativ e c h a r a c t e r i s t i c s of f i n a n c i a l s t a t e m e n t s

TIME LI N ESS
All the information in the financial statements must be provided within a relevant span of time. The
disclosures must not be excessively late or delayed so that while making their econom i c decisions
the users of these statements posses all the relevant a n d u p - t o - d a t e knowledge. Although this
characteristic m a y take more resources but still it is a vital characteristic as delayed information
makes any corrective reactions irrelevant
 PARTIE S W H O IN TERESTED IN FIN AN C IA L
STATEME N TS IN GEN ERAL C AN BE CATEGO RIZ ED
IN TO TW O GRO U PS, N AME LY

IN TERN AL U SER

• C O MP AN Y O W N ER,
• M A N AGER O R C O MP AN Y LEAD ER
• EMP LOYEE
 PARTIE S W H O IN TERESTED IN FIN AN C IA L
STATEME N TS IN GEN ERAL C AN BE CATEGO RIZ ED
IN TO TW O GRO U PS, N AME LY

EX TERN AL U SER

• IN V ESTO R
• LEN D ER
• C U STO ME R
• GO V ERN ME N T
• PU BLIC
 The Element Of Financial Statement
FASB IASB
FASB IAI
IASB • assets IAI
• liabilities • Aset
• Assets • equity • Liabilities
• Liabilities • revenues • Equity
• expenses • Income
• Equity • gains
• Expenses
• Revenue • losses
• Gain
• investment by
• Expenses owners
• Losses
• distribution to • Investment by
owners Owners
• comprehensive • Distribution to
income owners
• Comprehensive
Income
DESCRIPTION ACCORDING TO THE ELEMENT
ASSETS
are probable future e c o n o m i c
benefits obtained or controlled by
a particular entity as a result of
past transactions or events.
EXPEN SES
are outflows or other uses of assets or
incurring of liabilities during a period
from delivering or producing goods or
rendering services, or carrying out
other activities that constitute the
entity's ongoing major or central
EQ UITY
is the residual interest in the assets of a n
entity that remains after d e d u c ti ng its
liabilities. In a business entity, equity is the
ownership interest.
LIA BILITIES
are p ro b a b le future sacrifices of e c o n o m i c
benefits arising f r o m present obligations of a
particular entity to transfer assets or provide
services to other entities in the future as a
result of p a s t transactions or events.
 DESCRIPTION ACCORDING TO THE ELEMENT
REV EN UES
are inflows or other enhancements of assets of
an entity or settlement of its liabilities ( o r a
combination of b o t h ) during a period f r o m
delivering or producing goods, rendering
services, or other activities that constitute the
entity's ongoing major or central operations.
LO SSES
are decreases in equity ( n e t as s e ts ) fro m
peripheral or incidental transactions of an
entity a n d from all other transactions a n d
other events a n d circumstances affecting the
entity during a period except those that result
fro m expenses or distributions to owners.
GAIN S
are increases in equity ( n e t a s s e t s ) f r o m
peripheral or incidental transactions of a n
entity a n d f r o m all other transactions a n d
other events a n d circumstances affecting
the entity during a period except those
that result f r o m revenues or investments
by owner
IN V ESTM ENTS BY O W N ERS
are increases in net assets of a particular
enterprise resulting f r o m transfers to it f r o m
other entities of something of value to obtain
or increase ownership interest ( o r e q u i t y ) in it.
 DESCRIPTION ACCORDING TO THE ELEMENT
D ISTRIBUTIO N S TO O W N ERS
are decreases in net assets of a particular
enterprise resulting fro m transferring assets,
rendering services, or incurring liabilities to
owners. Distributions to owners decrease
ownership interest or equity in an enterprise.
C O M PREHEN SIV E IN C O M E
is the c h a n g e in equity ( n e t a s s e ts ) of an
entity during a period from transactions a n d
other events a n d circumstances fro m
nonowner sources. It includes all changes in
equity during a period except those resulting
fro m investments by owners a n d distributions
to owners
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