Abstract
Financial statements suffice for purposes of communication of financial and non-financial information to end consumers. These consumers in one way or another use the information in the decision making situations they are confronted with. Some of the basic financial statements include; the statement of income, the statement of financial position, the statement of cashflow and the statement of changes in equity and reserves. On the other hand, consumers of financial statements can be divided into two broad groups; internal consumers and external consumers. Internal consumers include managers and employees while external consumers are creditors, investors and government regulatory bodies. The information contained in the four financial statements assist these parties assess issues of credibility, profitability, investment potential, the going concern, among others. Financial statements, therefore, inform an important portion of the overall steering and management of entities especially in light of the stewardship concept of management often practices in most entities. However, it must be appreciated that financial statements have their own limitations and attempts to cure such limitations include elements of auditing.
Financial statements refer to the financial accounts that accountants prepare and present to give financial and non-financial information concerning the operations of an entity or business concern. Four basic financial statements for purposes of this paper include; the income statement, the statement of financial position, the cash-flow statement and the statement of changes in equity and reserves. It should be appreciated from the onset that financial statement suffice for purposes of communicating ideal and necessary yet unique financial and non-financial information. The mentioned statements are no exception to that general rule and in many cases suffice for the communication of the financial state of affairs of the entity.
The income statement is a financial statement that shows the outcomes of transactions in terms of incomes and expenditures for the entire financial year. In that context, it is this statement that indicates the costs incurred and revenues earned over the period giving the overall outcome. The overall outcome is the profit or loss for the financial period. The statement of financial position indicates the financial position of the entity as at last date of a financial period. In other words, the statement indicates the assets, liabilities and capital of the entity. In the ordinary bookkeeping equation, the financial position is prepared in a way that the total assets of an entity equal the capital and liabilities of that entity. This statement consequently gives a point of information of the bookkeeping equation position of the entity. The cashflow statement is a statement that indicates the actual cash inflows and outflows over the financial period. A cashflow refers to the actual cash and its equivalent that is transacted during a financial period. The cashflow statement, therefore, shows the actual movement of cash either in or out of the entity. The statement of changes in equity and reserves shows the changes that have since occurred in equity and reserves of the entity. This statement often works as a detailed illustration of the changes in the capital portion of the statement of financial position.
All the financial statements mentioned are often used internally and externally. The statements serve different purposes and are consumed in different levels depending on the user. For the internal consumption, it is the managers and employees who often use the statements. The income statement shows the incomes and expenditures of an entity. From a managerial point of view, this statement is used in the analysis of costs and incomes for operational purposes. In addition, the manager as the financial steward of the entity needs to know what profit the operations generated and where prudent use of resources is necessary. Employees are interested in the income statement for professional interests. One, employees need to know the going concern and profitability of the entity to assess their job security. Secondly, an employee needs the information to analyze and appraise his or her own performance in the entity.
The financial position indicates the assets, liabilities and capital of the entity. This information is essential for managerial evaluation of the financial stewardship role as well as analysis of the investment options at the disposal of the entity. For the employee, the financial position statements can be used to predict the going concern and stability of the entity hence make informed decisions as to continuity at the workplace. The cashflow statement would be useful for the managers for the evaluation and prediction of the liquidity of the entity. This information is important in decision making functions at the managerial level. Finally, the statement of changes in equity and reserves, to the management, is only important for purposes of accountability in consonance to the stewardship role.
Externally, these statements are consumed mainly by creditors, investors and government regulatory bodies. The income statement shows the profitability of the entity and would consequently be used for purposes of computing an entity’s tax liability by the government. Creditors will use the income statement to assess the credibility and the ability of the entity to repay loans. Investors will use the income statement to make investment decision based on the expected return by evaluating the entity’s profits and dividend payout. The financial position statement indicates the assets and liabilities. This information is important for a creditor who relies on collateral. In assessing the degree of collateral available, hence the amount of credit allowable for the entity, creditors would look at the financial position statement. From the financial position statement, the investors are able to know what assets owned by an entity and its liabilities. Investors also use financial statements to assess the going concern of an entity. The cash flow statement can be used to gauge the liquidity of the entity hence used in designing the debt policy by the creditor to the entity. Investors are often investing in liquid companies so as to hedge their funds against being absorbed in bankruptcy cases. The statement of changes in equity and reserves would be used by investors to determine the detailed intrigues of the entity’s capital. Such information is useful in making decisions on investments.
Reference
Banks, E. (2010). Finance: The Basics. New York: Routledge.
