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Financial Statements

Financial statements are structured representations of the financial position and the performance of an enterprise. To have a record of all business transactions and to determine profit and loss and financial position (asset and liability on a particular day) of an enterprise, entities prepare financial statements viz., Profit and Loss account, Balance Sheet, Cash Flow Statement etc.

Qualitative Characteristics of Financial Statements

  • Understandability: An essential quality of the information provided in the financial statement is that it must be understandable by the users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities
  • Reliability: The information is said to be reliable when it is free from material error. Reliability of the financial information depends on faithful representation, substance over form, neutrality, prudence, completeness etc.
  • Relevance: Information is said to be relevant when it influences the economic decisions of the users by helping them to evaluate the performance of the business
  • Comparability: Users must be able to compare the financial statements of an enterprise through different time period in order to identify the trends in the financial position, performance, cash flow, etc.
  • Materiality: The information is material if its misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the firm
  • Full, fair and adequate disclosure: The financial statements must disclose all the reliable and relevant information about the business enterprise to the management and also to the external users enabling them to take reasonable and rational decisions
  • Prudence: Prudence means conservatorium, which states, provide for all expected losses but never for anticipated profits. All the uncertainties and their nature should be disclosed so that it helps in proper decision making.
  • Completeness: To be reliable, the information in the financial statements must be complete within the bounds of materiality and cost. An omission can cause the information to be false or misleading

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