Financial Statements

Hello Everyone, 

Our Today’s topic should have been the first of the chain, but it’s never too late J

So, Today we are going to focus on what a financial statement is. Let me add here a statement I heard recently that financial statements are scorecards. Every single figure is telling you a story behind it. You just got to start reading this story. Well, a formal definition of financial statements is something like,

Financial statements are a collection of reports about an organization's financial results, condition, and cash flows. They are useful for the following reasons: 

• To determine the ability of a business to generate cash, and the sources and uses of that cash.
•  To determine whether a business has the capability to pay back its debts. 
• To track financial results on a trend line to spot any looming profitability issues. 
• To derive financial ratios from the statements that can indicate the condition of the business.
• To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements

      Now coming to the major types of financial statements; they include 

•  Balance Sheet
• Income Statement
• Cash Flow Statement
• Owner’s Equity Statement

And now, one liner on each type of statement,

Balance Sheet presents the financial position of an entity at a given date. It is comprised of the following three elements: asset, liability and equity.

Income Statement also known as the Profit and Loss Statement, reports the company's financial performance in terms of net profit or loss over a specified period. Income Statement is composed of the following two elements: income and expense.

Cash Flow Statement presents the movement in cash and bank balances over a period. The movement in cash flows is classified into the following segments: Operating Activities, Investing Activities, and Financing Activities.

Owner’s Equity Statement also known as the Statement of Retained Earnings, details the movement in owners' equity over a period. The movement in owners' equity is derived from the following components: Net Profit, Share Capital Issued or repaired during a period, Dividend payments, Gains or Losses, Effect of change in accounting policy or effect of correction in accounting error.

  

Stay Good :)

LinkedIn

And in the end there is a message to me that I am not accepting so far

I’m sorry for all misdeeds
This is wrong because it has affected rather ruined you badly
In the future, I will be careful not doing like thi
Will you forgive please me? :(

Recognition Criteria of Assets

Hi Everyone,

We talked about key component of Balance Sheet earlier. 

Let’s talk about the criteria for Assets Recognition this time. Let’s first define what an asset is

“Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (IASB Framework).”

How do we recognize an asset, to qualify its inclusion to the balance sheet? 

• When expenditure is made, it can either be either recognized as an expense or an asset. The primary criterion for asset recognition is that the expenditure will result in economic benefits flowing to the owner in future reporting periods. The asset is then charged to expense over the expected number of periods during which economic benefits will be realized. (Land is one exception in this case, it has indefinite life)

• There must be an objective way to measure the asset. The purchase price of a fixed asset is an objective measurement, since the buyer is expending a specific amount of funds. However, it is not possible to objectively measure an internally-generated intangible asset, such as the value of customer relationships. Thus, given the difficulty of measurement, this type of asset cannot be recognized as an asset unless it relates to an acquisition, in which case a portion of the purchase price is allocated to the intangible assets of the acquirer.

• Another criterion for asset recognition is the materiality of the expenditure. Asset tracking is time-consuming, and so is to be avoided from a clerical perspective. A business typically imposes a threshold, below which all expenditures are charged to expense, in order to reduce the number of its asset records. For example, a business sets its "cap limit" at $2,500, which means that all laptops purchased are charged to expense, even though they will clearly provide benefits over the next few years

Here is a diagrammatic illustration on how we can recognize an element as an asset 

  This is was a little explanation on the criteria for asset recognition. Feel free to contact for any related query. Have a good day! :)

LinkedIn

And in the end there is a message to me that I am not accepting so far

I’m sorry for all misdeeds
This is wrong because it has affected rather ruined you badly
In the future, I will be careful not doing like thi
Will you forgive please me? :(

Key Components of Balance Sheet

Hello Everyone,   

        

I have set the target to share some knowledge on financial statements. 

Starting with one of the major financial statements, balance sheet. The plan is to cover balance sheet in the first phase and then we will move on to the next financial statement and so on.

The first milestone of balance sheet illustration phase is, sharing some pieces of information on the key components. To start with, let’s have a look at a sample balance sheet.

 

 Now let’s agree on what a balance sheet is.

In the simplest words, “it is a summary or a snapshot of the financial balances of any business at a point in time”

In formal words, “The Balance Sheet sums up the economic resources (assets), obligations (debts and other long-term liabilities) and the owners’ Capital at a particular point of time. It also shows how the economic resources contributed by lenders and shareholders are used in the business. This statement is called a “balance sheet” because at any given time, Assets must equal Liabilities plus Capital, in other words, be in balance.”

So we can safely conclude the key components of a balance sheet as

• Assets
• Liabilities &
• Equities
  

Let’s proceed with Assets,

We can define assets as the resources owned by a business which benefit its future operations and are convertible to cash (cash itself is also an asset).

We can classify these resources as

• Current Assets (Cash and other resources that are expected to turn to cash or to be used up within one year of the balance sheet date
• Investments (the monetary assets purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price)
• Property, Plant & Equipment / Tangible Fixed Assets (assets of a long lasting nature, which are used in the normal operation of the company)
• Intangible Assets (assets that are not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace 

Next component here is Liabilities

We can define liability as obligations of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

And we can classify these obligations as

• Current Liabilities (A company's debts or obligations that are due within one year)
• Long Term Liabilities (the one the company expects to pay over the course of more than one year)

And then comes the last component of balance sheet which is Stockholder’s equity

In simple words, “Equity is the owner's value in an asset or group of assets.”

Equity represents the interest of a company's stockholders in the net assets of the company. According to the accounting equation:

Equity = Assets − Liabilities

This equation is the theme of whole balance sheet, called basic accounting equation and also sometimes called the balance sheet equation.

Feel free to contact me for any confusion on this.

Stay good :)


LinkedIn

And in the end there is a message to me that I am not accepting so far

I’m sorry for all misdeeds
This is wrong because it has affected rather ruined you badly
In the future, I will be careful not doing like thi
Will you forgive please me? :(