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The document provides study material for Management Accounting, specifically focusing on Financial Statements-II for B.Com Third Year students. It outlines the meaning, nature, objectives, and types of financial statements, emphasizing their importance in decision-making for various stakeholders. Key components discussed include the Income Statement, Balance Sheet, and additional statements like the Statement of Changes in Owner's Equity and Cash Flow Statement.

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4 views

1

The document provides study material for Management Accounting, specifically focusing on Financial Statements-II for B.Com Third Year students. It outlines the meaning, nature, objectives, and types of financial statements, emphasizing their importance in decision-making for various stakeholders. Key components discussed include the Income Statement, Balance Sheet, and additional statements like the Statement of Changes in Owner's Equity and Cash Flow Statement.

Uploaded by

avinashminj2004
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Bhopal School of Social Sciences

(Affiliated to Barkatullah University, Bhopal)

E-content Development

Study Material
For
MANAGEMENT ACCOUNTING
UNIT-II
Module 1
FINANCIAL STATEMENTS-II
(B.Com Third Year)

Prepared by:
Dr. Binoy Arickal
Assistant Professor
Department of Commerce
BSSS, Bhopal
Management A/c:Unit-II:Module-1

FINANCIAL STATEMENTS-II

Index

S. No. Content
1. Meaning and Definitions

2. Nature and Objectives

3. Types

4. References
Management A/c:Unit-II:Module-1

FINANCIAL STATEMENTS-II

ACCOUNTING SYSTEM: A SOURCE OF FINANCIAL INFORMATION


Accounting is the process of identifying, measuring and communicating the economic
information to the users for taking decisions. Accounting forms the source of information for
the management. The Accounting information is required by the owners, managers, creditors,
employees, customers and the tax authorities. There are some indirect users which include
financial analysts, trade associations & trade unions. The main purpose of the Accounting
System is to make the financial information available to the concerned parties which help them
in decision making.

MEANING OF FINANCIAL STATEMENTS


A financial statement is an organized collection of the data which contains the summarized
information of the firm’s financial affairs organized in a systematic manner. It consists of two
basic statements
1) Profit & Loss Account or the income Statement
2) Balance sheet or the position statement. The main objective is to convey the financial aspects
of a business concern in a simplified and systematic manner.

Definition:
According to John N Mayer
“ The financial statements provide summary of the accounts of a business enterprise, the
balance sheet reflecting the assets , liabilities and capital as on a certain date and the income
statement showing the results of operations during a certain period “

According to Anthony
“ Financial statements are the interim reports presented annually and reflect division of the life
of an enterprise into more or less arbitrary accounting period more frequently a year”
Management A/c:Unit-II:Module-1

FINANCIAL STATEMENTS-II

NATURE OF FINANCIAL STATEMENTS


The financial statements are prepared for the purpose of presenting periodical reviews of report
on progress by the management and also showcase the investments and results achieved during
the year. The nature of the financial statements is follows:

Recorded Facts: The financial statements are prepared of the basis of the facts that have been
recorded in the book of accounts. The recorded facts are on the basis of the original costs or
the historical costs and not on the replacement costs the financial statements will not show the
current financial position of the business.

Accounting Conventions: To make the financial statements uniform comparable and realistic
the financial statements are based on the accounting conventions.

Accounting Postulates: The preparation of the financial statements is based on certain


assumptions. These assumptions like Going Concern, Money Measurement concept etc are the
fundamentals of financial statements.

Personal Judgments: The financial statements are based on the accounting postulates and
conventions still the judgment of the accountant is very important like the inventory valuation
method to be selected, method of depreciation which has a major impact on the results of the
financial statements.
Thus the financial statements are always prepared on the basis of recorder facts. The basic
purpose of the financial statements of a corporation is to provide with the reliable information
to the concerned parties for making the dependable judgments.

OBJECTIVES OF FINANCIAL STATEMENTS


The main objectives of the financial statements are as under:
• The financial statements provide the financial information about the economic
resources and obligations of a business enterprise.
• It provides information that helps in estimating the earning potential of the business
• To provide information about the financial position of the business, this is useful for
the shareholders, creditors, employees, management, Government and customers.
Management A/c:Unit-II:Module-1

FINANCIAL STATEMENTS-II

• To disclose the other relevant information, this may benefit the users.
Thus the financial statements help in finding out the profit or loss sustained by the firm during
a given period of time and also to find out its financial position at the given point of time .For
the fulfillment of these objectives every business enterprises prepares the financial statements
which includes the income statement and the positional statement.

TYPES OF FINANCIAL STATEMENTS


According to the Generally Accepted Accounting Principle (GAAP) the financial statements
generally consist of two important statements:
• Income statement or profit and loss account.
• Balance sheet or the position statement.
A part from that, the business concern also prepares some of the other parts of statements,
which are very useful to the internal purpose such as:
• Statement of changes in owner’s equity.
• Statement of changes in financial position

Types of Financial Statement

The income
Balance sheet or the Statement of changes Statement of changes
statement or profit
position statement in owner’s equity in financial position
and loss account

Income statement or Profit and Loss Account


The profit and loss accounts are also known as the income statement and helps in determining
the operational efficiency of the business enterprise. The profit and loss account reflects the
earning capacity and the earning potential of the firm. This statement is the scoreboard of the
firm’s performance during a period of time. Therefore the Balance Sheet is the status statement
and the profit &loss accounts are the flow statement. It is the record of the income and expenses
to find out the overall Net Profit or Net Loss.
Balance Sheet or the Position Statement
Management A/c:Unit-II:Module-1

FINANCIAL STATEMENTS-II

Balance Sheet is one of the important financial statements. It indicates the financial position of
the business on a particular date. In the accounting language it includes the assets and the
liabilities and owner equity for a business firm on a particular date. In simple terms it indicated
the resources and the obligations of the business entity on a particular date.
Statement in Changes of Owners Equity
The statement in changes of owner’s equity shows the opening balance and the closing balance
and the reasons that cause the increase or decrease in the balance. Appropriations like
Dividend, General Reserve, Debenture Redemption Fund and capital redemption fund are
shown. The closing balance will be called as the Retained Earnings that will be carries forward.
Statement of Changes in Financial Position
These statements are used for the analysis and interpretation of the financial information
provided by the Balance Sheet and The Profit & Loss Account. They are of two types:
Fund Flow Statement: This statement analyses the financial condition between two periods.
Funds Denote the Working Capital. This statement gives information about the sources and the
uses of funds.
Cash Flow Statement: This statement wills summaries the causes of the changes in the cash
position of the business between two balance sheets. It gives cash position from operating,
investing band financial activities.

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS


The information provided in the financial statements form an important framework in the
managerial decision making. The analysis and interpretation of these statements form the basis
of decision making. There is a difference between analysis and interpretation. Analysis means
classification of data given in the financial statements in such a form so that it becomes
simplified. Interpretation means to explain the significance of the data simplified. The Analysis
and interpretation are complementary to each other. Interpretation requires analysis and
analysis is useless without interpretation.
Management A/c:Unit-II:Module-1

FINANCIAL STATEMENTS-II

Questions:
1.Explain the objectives of financial statements?
2.Explain different types of financial statements?

References:
Gupta K.L – Management Accounting
Sharma & Gupta- Management Accounting
Agarwal & Agarwal – Accounting for Managers
Agarwal, Jain & Jain – Management Accounting
https://accountlearning.com/tools-and-techniques-of-management-accounting/

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