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  Measuring and Reporting Financial Position

The Major Financial Statements - An Overview

The major financial statements intend to give a view of the financial position and performance of a business. To attain this, a business's accounting system will generally generate three specific statements on a regular and recurring basis.

These three statements are regarded with answering the following questions:

  • What cash movements (i.e., cash in and cash out) took place over a specific period?
  • How much wealth (i.e. profit) was produced, or lost, by the business over that period? (Profit (or loss) is described as the increase (or decrease) in wealth arising from trading activities.)
  • What is the accrued wealth of the business at the end of that period and what type does the wealth take?  

To reply each of the questions that are described above, there is a unique financial statement. The financial statements are:

  • the statement of cash flows;
  • the income statement (also termed as the profit and loss account); and
  • the statement of financial position (also termed as the balance sheet).

Jointly they give an entire picture of the financial health of the business. However it is, worth pointing out that, when a straightforward business is at our starting point, the standards for arranging the financial statements apply uniformly to the largest and most complex businesses.

Every statement gives part of a picture portraying the financial performance and position of the business. We start by displaying the cash movements. Cash is a main resource that is essential for any business to function efficiently. Cash is needed to meet debts which may turn into due and to obtain other resources (like inventories). Cash has been explained as the 'lifeblood' of a business. Movements in cash are generally closely scrutinised through users of financial statements.

Though, it is unambiguous that reporting cash movements alone would not be sufficient to portray the financial health of the business. The alterations in cash over time do not tell us that how much profit was produced. The income statement gives us with information regarding this aspect of performance.

Final accounts of the business.

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Figure 2.1- the relationship between the statement of financial position, the income statement and the statement of cash flow

For outside users (which is virtually all users apart from the managers of the business concerned), these statements are generally backward looking since they are relies on information that is concerning past events and transactions. This can be helpful in giving feedback on previous performance and in recognizing trends that give clues to future performance. Though, the statements can also be ready by using projected data to assist assess possibly future profits, cash flows and so on. The financial statements are generally ready on a projected basis for internal decision-making purposes only.

Managers are generally reluctant to publish these projected statements for outside users because they might reveal important information to competitors.

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