Commerce Exam > Commerce Notes > Crash Course of Accountancy - Class 12 > Introduction - Financial Statements of Companies
Introduction - Financial Statements of Companies | Crash Course of Accountancy - Class 12 - Commerce PDF Download
Meaning of Financial statements
· Financial statements are the end projects of accounting process.
· They provide information about the profitability and the financial position of a business.
· These statements include at least two statements:
1. Income Statement or Statement of Profit & Loss
2. Statement of Financial Position or Balance Sheet
Meaning of Income Statement or Statement of Profit & Loss:
It shows the net results of the 3business operations, i.e., net profit or loss during an accounting period.
Meaning of Statement of Financial Position or Balance Sheet:
It shows the nature and amount of assets, liabilities and capital of a business and indicates the financial position of the business at a particular date.
Objectives of Preparing Financial Statements:
(i) To present a true and fair view of the financial performance (i.e. profit/loss) of the business;
(ii) To present a true and fair value of the financial position (i.e. Assets/Equity & Liabilities) of the business.
Characteristics of Financial Statements
(i) Financial statements are related to past period and hence are historical documents.
(ii) They are expressed in terms of money.
(iii) Financial Statements show profitability through Statement of Profit & Loss and financial position through Balance Sheet.
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FAQs on Introduction - Financial Statements of Companies - Crash Course of Accountancy - Class 12 - Commerce
| 1. What are the main financial statements of a company? |  |
Ans. The main financial statements of a company are the balance sheet, income statement, and cash flow statement. These statements provide a snapshot of a company's financial health, including its assets, liabilities, revenue, expenses, and cash flows.
| 2. How can I analyze a company's financial statements? | |
Ans. To analyze a company's financial statements, you can use various financial ratios and metrics such as profitability ratios (e.g., gross profit margin, net profit margin), liquidity ratios (e.g., current ratio, quick ratio), and solvency ratios (e.g., debt-to-equity ratio, interest coverage ratio). These ratios can help you assess the company's financial performance, efficiency, and ability to meet its financial obligations.
| 3. What is the purpose of the balance sheet? | |
Ans. The balance sheet provides a snapshot of a company's financial position at a specific point in time. It shows the company's assets (what it owns), liabilities (what it owes), and shareholders' equity (the residual interest in the company's assets after deducting liabilities). The balance sheet helps investors and stakeholders evaluate the company's liquidity, solvency, and overall financial health.
| 4. How is net income calculated from the income statement? | |
Ans. Net income is calculated by subtracting all expenses (such as cost of goods sold, operating expenses, and taxes) from the company's total revenue. It represents the profit or loss generated by the company during a specific period. Net income is an important metric for investors and analysts to assess the company's profitability and financial performance.
| 5. What does the cash flow statement show? | |
Ans. The cash flow statement shows the cash inflows and outflows of a company during a specific period. It categorizes cash flows into three main categories: operating activities (cash generated from the company's core operations), investing activities (cash used for investments in assets or received from the sale of assets), and financing activities (cash received from or used for financing, such as issuing or repaying debt, or issuing or buying back shares). The cash flow statement helps investors and analysts assess the company's ability to generate cash and its cash management practices.
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