Objectives of financial statements pdf

Audit of financial statements provides a guarantee on the figures and ensures that the objectives are well achieved. This is a guide to Objectives of Financial Statements.

Here we discuss an introduction to Objectives of Financial Statements with explanation, and top 8 objectives in detail explanation. You can also go through our other related articles to learn more —.

Submit Next Question. By signing up, you agree to our Terms of Use and Privacy Policy. Forgot Password? This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy. Types of Analysis and Interpretations The analysis and interpretation of financial statements can be classified into different categories depending upon : I.

The Materials Used II. Modus Operandi Methods of Operations to be followed 1. On the basis of Materials Used: a External Analysis. On the basis of Modus Operandi a Vertical Analysis. The following chart shows the classification of financial analysis: Financial Statement Analysis! On the Basis of Materials Used On the basis of materials used the analysis and interpretations of financial statements may be classified into a External Analysis and b Internal Analysis. Outsiders may be investors, creditors, suppliers, government agencies, shareholders etc.

These external people have to rely only on these published financial statements for important decision making. This analysis serves only a limited purpose due to non-availability of detailed information. These internal people who have access to the books of accounts and other informations related to the business. Such analysis can be done for the purpose of assisting managerial personnel to take corrective action and appropriate decisions.

On the basis of Modus Operandi On the basis of Modus operandi, the analysis and interpretation of financial statements may be classified into: a Horizontal Analysis and b Vertical Analysis. Under this type of analysis, comparison of the trend of each item in the financial statements over the number of years are reviewed or analyzed.

This type of comparison helps to identify the trend in various indicators of performance. In this type of analysis, current year figures are compared with base year for figures are presented horizontally over a number of columns. Under this type of analysis, a number of ratios used for measuring the meaningful quantitative relationship between the items of financial statements during the particular period.

This type of analysis is useful in comparing the performance, efficiency and profitability of several companies in the same group or divisions in the same company. Rearrangement of Income Statements Financial statements should be rearranged for proper analysis and interpretations of these statements.

The items of operating revenues, non-operating revenues, operating expenses and non- operating expenses are rearranged into different heads and sub-heads are given below: Income Statement Operating Statement for the year endings. Particulars Amount Rs. Amount Rs. Opening stock of Raw Materials Add: Purchases Less: Purchases Returns..

Freight and Carriage Less: Closing Stock of Raw Materials Raw Materials Consumed Add: Direct wages Factory Factory Rent and Rates Power and Coal Depreciation of Plant and Machinery Depreciation of Factory Building Work Manager's Salary Other Factory Expenses Add: Opening Stock of working progress Opening Stock of Finished goods Less: Closing Stock of work in progress Closing Stock of Finished goods Cost of Goods Sold Less: Net Sales Less sales return and Sales tax Administrative Expenses Selling Expenses Distribution Expenses s.

Add: Non-Operating Income : Interest Received Discount Received Dividend Received Income Form Investment.. Any other Non-Trading Income.. Less: Non. Interest on Payment on Loan and Overdraft Loss on Sale of Fixed Assets Net Profit Before Interest and Tax Less: Interest on Debenture Net Profit After Interest and Tax In order to judge the financial position qf a concern, it is also necessary to rearrange the balance sheet in a proper set of form.

For analysis and interpretation, the figures in Balance Sheet rearranged in a Vertical Form and given below. Cash in Hand Cash at Bank Bills Receivable Sundry Debtors Marketable Securities Other Short-Term Investments.. Liquid Assets Add: Stock in Trade Current Assets Less: Current Liabilities : Bills Payable Sundry Creditors Bank Loans Short-term Bank Overdraft Outstanding Expenses Accrued Expenses Trade Liabilities Other Liabilities Payable within year Total Current Liabilities : Add: Provisions: 4 Provision for Tax Proposed Dividend Provision for Contingent Liabilities Land and Buildings Plant and Machinery Loose Tools Furniture and Fixtures Patents and Copyrights Live Stock Investment in Subsidies..

Unquoted Investments Other Non-Trading Investments Advances to Directors Less: Long-Term Liabilities 10 Debenture Long-Term Debt Other Long-Term Loan payable after a year Financial Statements; Analysis and Interpretation 1 Comparative Financial Statements Under this form of comparative financial statements both the comparative Profit and Loss Account and comparative Balance sheet are covered. Such comparative statements are prepared not only to the comparison of the vanous figures of two or more periods but also the relationship between various elements embodied in profit and loss account and balance sheet.

It enables to measure operational efficiency and financial soundness of the concern for analysis and interpretations. The following information may be shown in the comparative statements: a Figures are presented in the comparative statements side by side for two or more years. Absolute Percentage in Rs. The rate of net profit is also increased to the extent of This indicates that the overall profitability of the concern is good.

Profit and Loss Account for the Year and Cr. Particulars Particulars Rs. The gross profit has declined by - 4. It indicates that performance of operational efficiency is not much better and the cost of sales has not been under control.