Components of Financial Statements

All commercial companies produce financial statements annually. In many countries, these have to be filed with the government and sent to shareholders. So, the statements filed with the government are available to the public i.e., to competitors, customers, suppliers and financial analysts and consultancies. Generally, large companies publish their statements on their websites and in newspapers. These companies are well aware that this will create more confidence in those with whom the company wishes to do business.

The financial statements consist -

Profit and Loss Account

It is also called as 'Income Statement'. It indicates the amount of net income or loss obtained by the company during a particular period. Net income is the excess of revenues over its expenses, and the net loss is the excess of expenses over its revenues. It gives the summarized operating information about the sales, costs, incomes, profits and losses of the company during a particular period. It is the best measure to assess the profitability and performance of the company.

Balance Sheet

It is also called as 'Statement of Financial Position'. It depicts the financial position of a company on a particular date. It gives the information of how the company has been financed and how that money has been invested in various productive resources. A company can obtain finance from owners and outsiders. Thus, the balance sheet has three major sections viz., assets (i.e., the resources of the company), liabilities (i.e., the debts of the company) and shareholder's equity (i.e., the amount invested by owners). At any time, the total amount of assets must be equal to the amount invested by owners and creditors. The balance sheet is based upon the fundamental accounting  equation of,

   Assets = Liabilities + Equity.

Cash Flow Statement

It is also called as 'Statement of Cash flows'. It reports the amount of cash collected and paid out of a company on operating, investing and financing activities. The type of activities that come in each of these categories will be explained in chapter "Cash Flow Statement". Preparation of this statement is obligatory in most of the countries. In India, preparation of cash flow statement is mandatory for all companies whose debts and securities are listed in recognized stock exchanges and for all other commercial, industrial and business reporting enterprises, whose turnover for the accounting period concerned exceeds Rs.50 crore.

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