UNIT The following points are to be recalled before learning financial statement analysis: Accounting principles Indian Accounting Standards Preparation of profit and loss account and balance sheet Points to recall . Introduction Business concerns prepare income statement and balance sheet at the end of an accounting period to ascertain the profitability and the financial position respectively. These statements give the totals of different expenditures, revenues and the net result, namely, profit or loss during the given period and balances of assets and liabilities and capital as on the last date of the accounting period. Thus, financial statements are sources of financial information.
However, these statements do not give the relationship among the various items or the reasons for changes in the amounts of these items between two dates and the effect of such changes. For this purpose, different tools of financial statement analysis are used. . .
Financial statements . . Meaning of financial statements Financial statements are the statements prepared by the business concerns at the end of the accounting period to ascertain the operating results and the financial position. The basic financial statements prepared by business concerns are income statement and balance sheet.
Income statement includes manufacturing account and trading and profit and loss account. It shows the net results of business activities during an accounting period. Balance sheet is a statement of assets and liabilities which shows the financial position as on a particular date. Apart from these two basic statements, business concerns may also prepare cash flow statement, funds flow statement and statement of changes in financial position.
. . Features of financial statements Following are the features of financial statements: (i) Financial statements are generally prepared at the end of an accounting period based on transactions recorded in the books of accounts. (ii) These statements are prepared for the organisation as a whole.
(iii) Information is presented in a meaningful way by grouping items of similar nature such as fixed assets and current assets. (iv) Financial statements are prepared based on historical cost. (v) Financial statements are prepared based