Financial Reporting

MEANING:-

Financial reporting can be defined as “communicating information and knowledge that relates directly and indirectly to the information provided by the accounting system i.e information about well-known resources, earnings done in a financial year, and lastly obligations. ( FASB ) Financial Accounting Standards Board [USA]. In all financial reporting is a medium of giving information that may be useful in making a business successful and can help economic decisions.

OBJECTIVES:-

The objectives of financial reporting mainly affect the economic, legal, political, and social environment in which financial reporting takes place. When the objectives of financial reporting are providing information the primary objective is making economic decisions. According to FASB, financial reporting should give the following information

1) Information for investment and credit decisions
2) Information for assessing cash flow
3) Information about economic resources
4) Information about financial performance
5) Information about liquidity, and solvency

1- Information for investment and credit decisions:-

Financial reporting gives every related information that is useful to present and potential investors and creditors and other users in making a clear and transparent investment, credit, and related decisions. The information should be comprehensive to those who have a reasonable understanding of business and economic activities and are willing to study the overall view of its knowledge.

2- Information for assessing cash flow:-

Financial reporting should provide information to help present and future investors and creditors and other users in assessing the amounts, timing, and uncertainty of cash receipts from various sources such as operations, dividends, interest, etc.

3- Information about economic resources:-

Financial reporting should also provide information about the economic resources of an entity, the claims to those resources ( obligations of the entity to transfer resources to other firms and equity shareholders i.e owner of the company), and the impact of transactions, events, and circumstances that change resources and claims to those resources.

4- Information about financial performance:-

The basic or we can say every organization provides information about an entity’s financial performance during a current financial year. Investors and creditors often check the past financial reports and profit and loss a/c of the company before investing in any organization. Investors do this because they get a glance and the prospects of an enterprise.

5- Information about liquidity and solvency:-

Financial reporting should provide information about how an entity reflects and uses its cash inflow and cash outflow during a financial year. They must also show the borrowings from the creditors and when and how they are going to make the repayment of it. Its main function is to see the capital transactions, including cash dividends and other distributions of the company and other factors that reflect the liquidity and solvency of the enterprises.

FINANCIAL STATEMENTS

MEANING:-

Financial statements play an important element in financial reporting. A complete financial statement mainly involves a balance sheet, a statement of profit and loss( also known as income statement/profit and loss appropriation a/c ). Financial statements do not include the minutes of the meeting held in companies meeting the agenda points discussed in the meeting and the statements given by the BOD i.e board of director or the statement given by the chairman of the company, discussion by management, etc.

OBJECTIVES:-

  • 1)Basic objective
  • 2)Financial position
  • 3)Performance
  • 4)Cash flows
  • 5)Accountability

Basic objective:-

The objective of financial statements is to provide information about the financial position, overall performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. The investors should know the capacity of an enterprise to its employees working for them and suppliers, meet interest payment, repayment of loans taken from financial institutions

Financial position:-

The financial position reflects the current position of the company the economic resources, its control of the economy its liquidity, and the solvency ratio. The asset is useful in predicting future cash flows in the company. Information towards liquidity and solvency is useful in predicting the ability of the enterprise

Performance:-

Information regarding performance is noted by seeing the profit-making of the company. It asses future cash flows and predicts the profit of the company.

Cash flows:-

Information concerning cash flows of an enterprise is useful in order to evaluate its financing, investing, and operating activities during the reporting period. This information helps to broadcast the ability of the enterprises to generate and make proper use of the cash-flows.

Accountability:-

Financial statements also show the results of management or the accountability of management for the resources entrusted to it. This helps the users to make economic decisions e.g; whether to hold or sell their investment in the enterprise or whether to reappoint or replace the management.

COMPONENTS:-

Balance sheet:-
Information about the financial position is provided in a balance sheet.

Profit and loss:-
Information about performance is the primary concepts provided in an income statement or we can say the statement of profit and loss.

Cash flow statements:-
Information about cash flows is provided in the financial statements by means of a cash flow statement

Notes and schedules:-
The financial statements also contain noted and supplementary schedules and other information. Information about business and geographical segments and the effect of changing prices on the enterprise (Inflation adjusted accounts) may also be provided in the form of supplementary information.

Users of financial statements:-

Investors:-
They need the information to help them to determine whether they should buy, hold, or sell. They need to assess the ability of the enterprise to pay dividends and interest on time.

Employees:-
Employees are interested to know the profitability of their employers. They need to know the ability of the company that they can provide remuneration, retirement benefits like pension, gratuity while retirement and employment opportunities.

Lenders:-
Lenders need to determine whether their loans and the interest attaching to them, will be paid when the due period arises

Creditors:-
Suppliers and other creditors need to determine whether amounts owing to them will be paid when due. Trade creditors lend money for a short period of time so they can earn more on it.

Customers:-
Customers have an interest in information about the continuity of the company, especially when they have a long-term involvement with or maybe they are dependent on them

Government:-
The government is very much to indulge in the allocation of resources and the activities of the enterprise. They also require information in order to regulate the activities of enterprises and determine taxation policies, and to calculate the national income.

Public:-
Enterprises affect members of the public in a variety of ways. Financial statements may assist the public by providing information about the trends and ongoing developments

General instructions for preparation of the balance sheet:-

  • ☆Current Asset
  • ☆Operating Cycle
  • ☆Current liability
  • ☆Trade Receivable
  • ☆Trade Payable
  • ☆Disclosure in Notes
  • ☆Current asset:- An asset shall be classified as current when it satisfies any of the following criteria:-
  1. (i)it is expected to be realized in or is kept for sale or consumption in, the company’s normal operating cycle
  2. (ii)It is held for purpose of being traded
  3. (iii)they have to realize within 1 year after the reporting date
  • ☆Operating cycle:- An operating cycle is a time between the acquisition of assets for processing and their realization in cash or cash equivalents. Where the normal operating cycle cannot be identified it is assumed to have a duration of 12 months.
  • ☆Current Liability:- A liability shall be claimed as current when it satisfies any of the following terms:-
  1. a)it is expected to be settled in the company’s normal operating cycle
  2. b)held primarily for the purpose of being traded in the market
  3. c)it is due to settled within twelve months after the reporting date

All other liabilities shall be known as non-current.

  • ☆Trade receivable:-

A receivable shall be classified as a trade receivable if it is given with due respect to the amount due on account of goods sold on services rendered in the business

  • ☆Trade payable:-

A payable shall be classified as trade payable it is in respect of the amount due on account of goods purchased or services received in the business

  • ☆Disclosure in notes:-
  1. [A]Share Capital
  2. [B]Reserve and surplus
  3. [C]Long-term Borrowing
  4. [D]Other Long-term Liabilities
  5. [E]Long-term provision
  6. [F]Short-term Borrowing
  7. [G]Trade payable
  8. [H]Other current liability
  9. [I]Short term provisions
  10. [J]Tangible asset
  11. [K]Intangible asset
  12. [L] Noncurrent investments
  13. [M]Long-term loans and advances
  14. [N]Other non-current assets
  15. [O]Current investment
  16. [P]Inventories
  17. [Q]Trade receivable
  18. [R]Cash
  19. [S]Short term loans and advances
  20. [T]Current assets

1- Share capital:-

  • 1)the number and amount of shares authorized
  • 2)the number of shares issued; subscribed, and fully paid up
  • 3)subscribed and not fully paid up
  • 4)reconciliation of the number of shares
  • 5)the rights
  • 6)the restrictions
2- Reserves and surplus:-
Reserves and surplus shall be classified as follows:-
  • a)capital reserve
  • b)capital redemption reserve
  • c)security premium reserve
  • d)debenture redemption reserve
  • e)revaluation reserve
3- Long term borrowings:-
long term borrowings shall be classified as:-
  • a)Bonds/Debentures
  • b)Terms loans
 from banks
 from other parties
  • c)deferred payment liabilities
  • d)deposits
  • e)loans and advances
4- Other long-term liabilities:-
other long term liabilities shall be classified as:-
  • a)Trade payables
  • b)others
5- Long-term provisions:-
The amounts shall be classified as:-
  • a)provision for employees benefits
  • b)others(specify nature)
6- Short term Borrowings:-
short term borrowing shall be classified as:-
a)loans repayable on demand
   from banks
   from other parties
7- Trade payable:-
The principal amount and the interest are due thereon to be shown separately. The amount of interest accrued and remaining unpaid at the end of each accounting year.
8- Other current liabilities:-
The amount shall be classified as:-
  • a)current maturities of long term debt
  • b)current maturities of finance lease obligations
  • c)income received in advance
  • d)interest accrued
  • e)unpaid dividends
9- Short term provision:-
The amount shall be classified as:-
  • a)provision for employee benefits
  • b)others(specify nature)
10- Tangible assets:-
Classification shall be given as:-
  • a)land
  • b)buildings
  • c)plant and equipment
  • d)furniture and fixtures
  • e)vehicles
  • f)office equipment
  • g)others(specific nature)
11- Intangible assets:-
Classification shall be given as:-
  • a)goodwill
  • b)brands
  • c)trademark
  • d)computer software
  • e)publishing titles
  • f)mining rights
  • g)copyrights
  • h)patents
  • i)recipes/formulae/models/designs/
  • prototypes
  • j) licenses
  • k)franchise
  • l)others(specify nature)
12 Non-current investment:-
The noncurrent investment shall be classified as trade investment and others are described below:-
  • a)investment property
  • b)investment in equity shares
  • c)investment in preference shares
  • d)investment in government or trust securities
  • e)investment in units, debentures, or bonds
  • f)investment in mutual funds
  • g)investment in a partnership firm
  • h)other non-current investment (specify nature)
13- Long term loans and advances:-
i)long term loans and advances shall be classified as:-
  • a)capital advances
  • b)security deposit
  • c)loans and advances
  • d)other loans
ii)the above shall also be separately sub-classified as:-
  • a)secured, considered good
  • b)unsecured, considered good
  • c)doubtful
14- Other non-current assets:-
  • i)long term trade receivables
  • ii)others
  • iii)long term trade receivables shall be sub-classified as:-
  • a)secured, considered good
  • b)unsecured, considered good
  • c)doubtful
15- Current investment:-
  • a)investment in equity shares
  • b)investment in preference shares
  • c)investment in government
  • d)investment in units
  • e)investment in mutual funds
  • f)investment in a partnership firm
  • g)other investment

16- Inventories:-

  • a)raw material
  • b)work in progress
  • c)finished goods
  • d)stock in trade
  • e)stores and spares
  • f)loose tools
  • g)others

17- Trade receivables:-

Trade receivables shall also be sub-classified as:-

  • a)secured, considered good
  • b)unsecured, considered good
  • c)doubtful

18- Cash:-

  • a)balance with banks
  • b)cheques
  • c)drafts on hand
  • d)cash in hand
  • e)other

19- Short term loans and advances:-

  • (i)Short term loans and advances shall be classified as:-
  • a)loans and advances to related parties
  • b)others
  • (ii)The above shall also be sub-classified as:-
  • a)secured, considered good
  • b)unsecured, considered good
  • c)doubtful
20- Currents assets:-
This is an all-inclusive heading, which incorporates current assets that do not fit into any other asset categories.

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