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Financial Statements of a Company — Part 1: Meaning, Uses, Limitations and the Balance Sheet Format

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Lesson

Financial Statements of a Company

Part 1 — what financial statements are, who uses them, what they cannot tell you, and the Schedule III balance sheet.

In this lesson you will

Explain the meaning, nature and objectives of financial statements
Describe how different users rely on them, and state their limitations
Lay out the heads and sub-heads of the Schedule III balance sheet
Use the operating cycle and the twelve-month rule to separate current and non-current items

Part 1 at a glance

Concept

What are financial statements?

End products of the accounting process for a period.
Must give a true and fair view and follow Schedule III (Section 129).

Section 2(40), Companies Act, 2013; form as per Schedule III (Section 129).
Financial statement	What it shows
Balance Sheet	Financial position on a date: assets, and the equity and liabilities that finance them
Statement of Profit and Loss	Income, expenses and the profit or loss for a period
Cash Flow Statement	Cash coming in and going out during the period
Statement of Changes in Equity (if applicable)	How the owners’ equity moved during the period
Notes to accounts	The details, policies and break-ups behind the figures

Concept

Nature: facts, conventions and judgement

Table of the nature of financial statements: recorded facts, accounting conventions, postulates or assumptions, and personal judgements, each with an example
Element	What it means	An example
Recorded facts	Only transactions entered in the books, at their recorded amounts	Machinery shown at what was paid for it
Accounting conventions	Agreed rules of presentation	Conservatism: provide for a likely bad debt
Postulates (assumptions)	Basic assumptions behind the accounts	Going concern: the company will keep working
Personal judgements	Choices and estimates by the accountant	Useful life of a machine; method of valuing stock