Objective of Financial Statements

The objective of Financial Statements is to provide information about the financial position, performance, changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.

Purposes:

  • Meet common needs of most users.
  • Show the results of stewardship of management, or accountability of management for resources entrusted to it.
  • Do not, however provide the information that users may need to make decisions since they largely portray the financial effects of past events and do not necessarily provide non-financial information.

Financial Position – affected by the economic resources it controls, it’s financial structure, it liquidity, and solvency and it’s capacity to adapt changes. Statement of Financial Position previously called Balance Sheet. This statement answers the following questions:

  • What assets does the entity own?
  • What does it owe?
  • What are the residual equity interests in the entity’s net assets?

Financial Structure – source of financing the assets.  Borrowed capital indicates the amount of assets financed by creditors  and invested capital indicates what amount of assets has been financed by owners.

  • Useful in predicting future borrowing needs and how future profits and cashflows will be distributed.
  • Useful in predicting how successful the enterprise is likely to be in raising further finance.

Liquidity – refers to availability of cash in the near future after taking into account financial commitments over this period.

  • useful in predicting the ability  of the enterprise to meet it’s short term financial commitments as they fall due.

Solvency – refers to availability of cash over longer term to meet financial commitments as they fall due.

  •  useful in predicting the ability of enterprise to meet it’s long term financial commitments.

Capacity for adaptation – ability of enterprise to use it’s available cash for unexpected requirements and investment opportunities also known as financial flexibility.

  • useful in predicting or ability of enterprise to generate cash and cash equivalents in the future. It can be accomplished by raising cash in short notice either through borrowing or issuance of securities.

Financial Performance – performance of an enterprise comprises of it’s revenue,expenses, net income or loss for a period of time. It is the level of income earned by enterprise through effective and efficient use of resources. Information about performance is primarily provided in a statement of comprehensive income.

Unrealized gains and losses are to be reported on statement of comprehensive income :

  • Changes in Fair Value of Available for sale financial assets
  • Asset revaluation reserve
  • Foreign Currency Translation adjustments
  • Actuarial gains and losses on pension funds

Changes in Financial Position – refers to changes in the economic resources and obligation of an enterprise. All financial resources, working capital and liquid assets or cash.

  • Useful in assessing its investing, financing and operating activities during the reporting period.
  • Useful in providing the user with a basis to assess the ability of enterprise to generate cash and cash equivalent and the needs of the enterprise to utilize those cash flows.

Notes and Supplementary Schedule – additional information that is relevant to the users about the items in the balance sheet and income statement.

Includes:

  • Disclosure about risks and uncertainties affecting the enterprise
  • Any resources and obligations not recognized in the balance sheet
  • Information about geographical and industry segments and the effect on the enterprise changing prices.

 

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About Jonathan Ruiz CPA

Newbie Mentor and one of the influential author in the Philippines setting. His also the founder of PAM Academy and Developer of PAM PSE TRACKER application.
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