The performance of a company is reflected in its stock prices and the demand for its stock in the market. A company performing better and having brighter future prospects will be favoured by investors irrespective of the market fluctuations. But what is the measure of the company’s performance and how will the various stakeholders get a true picture of the company affairs and its relative position? This information is provided under the financial statements of the company which has relevant information for all the users and the correct picture of the analysis of the company.
So what are the 3 main financial statements that a company needs to publish and why are they relevant? Given below is a brief discussion of the important financial statements of a company and its users of the same.
What are financial statements?
The financial statements of a company are the statement of affairs of the company6, its transactions, and other aspects of the company that reflect its true and correct picture to the stakeholders. As per section 2(40) of the Act, the list of financial statements that need to be prepared by any company or body corporate that is registered under the Companies Act, 2013 is,
- Balance Sheet as on the end of the financial year (31st March)
- Statement of Profit or Loss or the Income and Expenditure Statement for the financial year.
- Cash Flow Statement
- Notes to Financial Statements
These financial statements are prepared as per Schedule III of the Companies Act, 2013 as well as the relevant guidelines, and regulations set under the Act. The main purpose of the financial statements is to provide the users with the correct and relevant information so as to enable them or assist them in making timely decisions regarding their investments or the corrective actions needed for the well-being of the company.
Also Read: Your detailed guide to reading a Profit & Loss Account statement
Why are financial statements important?
The importance of financial statements can be highlighted through the key objectives that are met by them. Some of these key objectives of the financial statements include the following,
- To provide information regarding the resources and the obligations of the company
- To provide a true and correct picture of the earnings and the growth potential of the company to help the investors retain a healthy portfolio
- To provide a true and correct picture of the cash flow as well as the fund flow of the organization, i.e., the sources of the funds and their application.
- To provide information regarding the management quality and their dedication towards achieving the objectives of the entity.
- Information regarding the accounting policies used by the organization in drafting the financial statements and maintaining the books of accounts during the said period.
The general objectives of financial statements ensure that they act as the guiding light for preparing them while adhering to the relevant provisions that are set by various authorities like SEBI, Companies Act, MCA, etc. This makes the financial statements the first point of reference and review for any potential investors of the company to ascertain the viability of their investments.
Which are the 3 important financial statements that a company needs to publish?
After learning the meaning and objectives of the financial statements, let us have a brief overview of the important financial statements that have to be published by any company (public company or private company) and body corporate that are registered under the Companies Act, 2013.
- Balance sheet
The balance sheet of a company is the position of the company as on the last day of the financial year, i.e., 31st March. It displays the information regarding the assets and the liabilities of the company (including the short-term and long-term both). Users can also get crucial information like the owners’ funds and debt funds employed in the company and can have a fair estimate of the financial health of such a company.
- Profit and loss statement
The statement of profit and loss is the account of the profit earned by the company through its operational and non-operational activities. The expenses of the company include cash and non-cash expenses as well as those that are accrued but not yet paid. It provides the investors with information on the net profitability of the company which can be compared to the industry standards and the competition.
- Cash flow statement
This is the third part of the financial statements that have to be mandatorily prepared by all the organizations. This statement reflects the cash flow through various activities like operating, financing, and investing activities. This gives the liquidity position of the company which helps them in budgeting and financial planning for the entity.
- Notes to accounts
The final part of the financial statements is the notes to the accounts. This part of the financial statements includes supplementary information that is relevant from the user’s point of view to understand the preparation of the financial statements. It also includes any special events or explanations that may need to supplement the accounting of a particular matter or exclusion of the same. These notes to accounts also provide information on the accounting policies and the Accounting Standards implemented by the company in drafting the same.
Financial statements are the mirror that shows the real position of the company. It helps the investors make informed decisions for their investments and aids the management to optimize their resources as well as weed out any incompetencies in the optimum performance of the company. These financial reports have to be filed with the MCA as per the prescribed procedure within the given time frame after being presented to the shareholders in the AGM for acceptance.
The top users of the financial statements are investors, shareholders, lenders, creditors, management, employees, government, and its other ancillary authorities.
A balance sheet is prepared on a particular day (usually the last day of the financial year) and reflects the balances of various assets and liabilities as of that day. The profit and loss statement is prepared for a definite period (usually a financial year) and is a record of the profit or loss incurred by the company through its operating and non-operating activities.
The order in which financial statements are prepared is stated below.
-Cash flow statement
-Note to financial statements
The common notes to accounts include the following,
-Information relating to adherence to the relevant accounting policies and Accounting Standards, IFRS, and other relevant guidelines in the preparation of the financial statements.
-Information relating to the depreciation of the assets
-Information relating to any subsequent events, contingent liabilities, or provisions
-Details of the basis of consolidation of financial statements (in case of subsidiaries)
-Information relating to the employee beenfits