Accounting for Decision Makers

5 Pages   |   740 Words
As per the requirements put forward by the International Accounting Standards (IAS 1: Presentation of financial statements), a complete set of financial statements must include at least four compulsory components (Thinggaard et al., 2006). The details of the each statement are as follows:
  • Statement of financial position commonly known as the Balance sheet, represents the assets, liabilities and invested capital of the entity. The fundamental accounting equation ‘Assets=Liabilities + Equity’ is derived from it. This statement borrows its accounting figures from basic accounting principles and the prevalent accounting policies (Larkin and DiTommaso., 2014). Its constituents include:
  • Statement of Profit or loss and other comprehensive income commonly known as Income statement, constitutes the revenues, expenses and income of the entity. An entity derives revenue by effusively utilizing its assets under operations. Where balance sheet represents the assets and liabilities, Income statement pertains to the costs incurred and benefits reaped from their utilization (Ittelson, 2009). The main components of Income statement are:

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  • Statement of changes in equity also known as a statement of retained earnings includes the detailed account of the evolution of owner’s equity for a given financial year. It takes the readymade figures from balance sheet and income statement for the computations (Ittelson, 2009). Relevant entries include,
  • Statement of Cash flows differentiates the accounting figures from the real cash flows and reports them in a separate format. Various business transactions do not include cash outlays, but they are still employed in the income statement for the computation of income(depreciation being the prime example) (Ittelson, 2009). Cash flow statement adds or removes certain entries, adjusts the income, and provides a final figure for the cash balance. It contains the following items:
Statement of Cash Flows
Net Income
Cash flow from Operating Activities
(Sales and Purchases, Depreciation, Inventories, Payables, Receivables etc.)
Cash flow From Investing Activities
Cash Flow from Financing Activities
(Interest Payments, debt Issuance, Dividend and Taxation etc.)
Financial statements are always prepared under the regulations put forward by the IASs. Firstly, for the preparation of financial statements, the core principles of consistency, comparability, materiality, prudence and going concern should be applied in a comprehensive manner (International Accounting Standards Committee, 2000). The process of the preparation of financial statement started when the journal entries of the transactions are recorded in the books of accounts. In the raw format, these entries represent a trial balance, a list of all the ledger accounts. The second step includes the closing of the books of accounts at the year end. This step relates to the adjustment of the already recorded transactions. In the next step, the figures from the adjusted trial balance are directly utilized by the balance sheet and income statement in order to arrive at the final amount of assets, liabilities, equity and net income etc. Once both these statements are finalized, the statements of retained earnings and cash flow are drafted (Stickney et al., 2009). Large companies own sophisticated information systems that record and store the details of every transaction. These systems automatically generate the final figures of the various elements of trial balance. Hence, the need for intensive and complicated paperwork has virtually disappeared. Before the completion and issuance of the financial statements, they must be reviewed and audited by a separate and independent third party. This process includes a detailed examination of the financial statements on the substances of credibility, accuracy, genuineness and validity, etc. Only after the external auditor has issued a detailed opinion on the financial statements, they are signed by the management in the annual general meeting and are subsequently made available to the stakeholders.


International Accounting Standards Committee, 2000. International Accounting Standards Explained. s.l.:Wiley.
Ittelson, T. R., 2009. Financial Statements: A Step-by-step Guide to Understanding and Creating Financial Reports. Revised ed. s.l.:Career Press.
Larkin, R. F. & DiTommaso., M., 2014. Statement of Financial Position. In: Not-For-Profit Gaap 2014: Interpretation And Application of Generally Accepted Accounting Principles For Not-For-Profit Organizations. Chichester, UK: John Wiley & Sons, Ltd, pp. 21-31.
Stickney, C., Weil, R., Schipper, K. & Francis, J., 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. 1st ed. s.l.:Cengage Learning.
Thinggaard, F. et al., 2006. Performance Reporting–The IASB's Proposed Formats of Financial Statements in the Exposure Draft of IAS 1. Accounting in Europe, 3(1), pp. 35-63.

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