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Objectives and Characteristics of Financial Statements

Last Updated : 05 Apr, 2023
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The accounting process ends with the preparation of the financial statement. The information about the financial position of any company is provided with the help of financial statements. The main objective of preparing the financial statement is to present a true and fair view of the financial performance and position. Accounting data is summarised in such a way that the profitability of the business is clearly visible. It also serves as an information tool for all the parties concerned with the firm. To guarantee consistency in reporting, these statements; which include an income statement, balance sheet, and statement of cash flows, must be prepared in accordance with predetermined and established accounting principles and conventions. 

Objectives of Financial Statements:

1. To provide useful information to the management of an organisation for the purpose of planning, controlling, analysing, and decision making.

2. To provide information to prospective investors to attract them, so that they can take rational decisions regarding their investment based on the reports.

3. To demonstrate a company’s creditworthiness to lenders and creditors, as financial reports help them in evaluating the ability of a company in repaying their money.

4. To provide information to the shareholders and public at large about the various aspects of the entity.

5. To disclose how an organisation is procuring and using various resources.

6. To facilitate the statutory audit.

7. To abide by different legal and governmental regulations.

8. To disclose information about the economic resources of an entity claims to these resources(liability and owner’s equity), and to show how these resources and claims have undergone changes over a period of time.

9. To supply details on the cash flows that a business is exposed to, including their timeliness and volatility.

10. To determine the liquidity position of an organisation, which in turn can be used to evaluate whether an organisation can continue as a going concern.

Characteristics of Financial Statements:

1. Recorded Facts: The financial statements of a business concern are nothing but a compilation of the recorded facts and figures pertaining to various transactions entered into by an organisation. Recorded facts refer to the information extracted from the financial transactions of an enterprise. 

2. Accounting Conventions: These refer to certain guidelines and a kind of course of action to be followed for the purpose of preparation of financial statements. Some of the conventions are materiality, conservatism, consistency, and full disclosure. It is imperative that recording in books of accounts should be done following these conventions in order to tackle any complicated or unclear business transactions.

3. Accounting Concepts: These refer to the generally accepted assumptions or rules or guidelines, which assist an accountant in the process of preparation of financial reports. They can be termed as basic building blocks for the recording of transactions in the books of accounts, which further makes the base for the preparation of financial statements. It is important that an accountant follows these concepts so as to maintain objectivity and neutrality in the accounting records and financial statements.

4. Accounting Standards: An accounting standard is a collection of procedures and guidelines used to standardise bookkeeping and other accounting operations over time and across different businesses. All aspects of an entity’s financial picture, including its assets, liabilities, income, outlays, and shareholders’ equity are subject to accounting standards. It is very important for accountants to comply with various accounting standards mentioned in the Company’s Act, 2013 for recording transactions in the books of accounts to ensure verifiability and consistency in reporting practices.

5. Selection of Accounting Policies: Accounting policies pertain to the different methods or techniques of dealing with certain items while recording them in the books of accounts. For example, an organisation might follow either the straight-line method or the written-down value method of depreciation. Another instance is the choice of the basis of accounting which could be: cash or accrual or a hybrid of these. These policies get reflected in the financial statements and inform the stakeholders about the policies being adopted by the organisation.

6. Estimates: While preparing financial statements a business concern might make certain assumptions or postulates. One such major assumption is the going concern concept of accounting. Here, the business is considered to be a going concern, meaning such an organisation would continue its operations for an unforeseeable period of time and would not stop in the nearby future. As a result of this, the span of recording and financial reporting is set to be one year. Estimating the useful life of an asset to provide depreciation, is yet another example of Estimates in accounting.

7. Source of Financial Information: Financial statements provide useful information to the management of an organisation for the purpose of planning, controlling, analyzing, and decision-making. They also facilitate prospective investors in making rational decisions about their investments based on the reports.

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