Accountancy · Chapter 10
Study notes aligned to the official NEB syllabus.
Financial statements are those reports which are prepared by a business organization's management to present the financial performance and position, as well as the true and fair picture of the financial position of the business, at the end of the accounting period.
Financial statements are a set of documents that show a company's financial status at a specific point in time. In other words, a financial statement is a document that summarizes an individual's or a business's financial position, including assets, liabilities and net worth.
Financial statements are prepared from the accounting records by following the generally accepted accounting principles (GAAP).
The important features of financial statements are as follows.
i. Judging the operational efficiency of the business. ii. Measuring the profitability. iii. Measuring short-term and long-term financial position. iv. Indicating the trend of achievements. v. Assessing the growth potential of the business; inter-firm comparison.
i. Financial statement analysis ignores qualitative aspects like quality of management, labour force and public relations. ii. Financial statements are historical in nature. iii. Financial statements do not show price-level changes, hence this also affects the analysis. iv. Financial statements are affected by the personal ability and bias of the analyst.
An income statement shows a company's revenues, expenses and profitability over a period of time. It is also sometimes called a profit and loss (P&L) statement or an earnings statement.
An income statement can be prepared in two different ways:
Single-step income statement: A single-step income statement offers a simplified snapshot of a company's revenue and expenses. All revenues are grouped together, and all expenses are grouped together, so that profit is found in a single step (Total Revenue minus Total Expenses).
Multi-step income statement: A multi-step income statement is a company's financial statement presenting revenues, costs and expenses for a specific reporting period in stages, that is, it separately works out Gross Profit, Operating Income, and Net Profit before arriving at the final Net Profit after tax.
| Particular | Details | Total |
|---|---|---|
| Sales revenue | xx | |
| Other income & gains | xx | |
| Total Revenue | xx | |
| Less: Expenses | ||
| Cost of goods sold | xx | |
| Office and administrative expenses | xx | |
| Selling and distribution expenses | xx | |
| Financial expenses | xx | |
| Other expenses and losses | xx | |
| Net profit before tax | (xx) | |
| Less: Tax expenses | xx | |
| Net profit after tax | xx |
| Particular | Details | Total |
|---|---|---|
| Sales Revenue (net) | ||
| Less: Cost of Goods sold: | ||
| Opening Stock | xx | |
| Add: Purchase | xx | |
| Less: Purchase return | (xx) | |
| Add: Wages | xx | |
| Add: Outstanding wages | xx | |
| Add: Carriage | xx | |
| Add: Import duty | xx | |
| Less: Closing stock | (xx) | |
| Gross profit | ||
| Less: Operating expenses: | ||
| (a) Office and Administrative expenses: | ||
| Salary, Add: Outstanding salary | xx | |
| Rent, Less: Prepaid rent | xx | |
| Depreciation | xx | |
| Insurance expenses | xx | |
| Audit expenses | xx | |
| Legal expenses | xx | |
| General expenses | xx | |
| Supplies expenses | xx | |
| Sundry expenses | xx | |
| Telephone & communication | xx | |
| Printing & Stationery | xx | |
| Repair & maintenance | xx | |
| Refreshment | xx | |
| Other office & administrative expenses | xx | |
| Total office and administrative expenses | (xx) | |
| (b) Selling & distribution expenses: | ||
| Salesman Salary | xx | |
| Salesman commission | xx | |
| Advertisement | xx | |
| Carriage outward | xx | |
| Promotion expenses | xx | |
| Sales tax | xx | |
| Depreciation of delivery van | xx | |
| Rent of showroom | xx | |
| Bad debt expenses, etc. | xx | |
| Discount | xx | |
| Total selling & distribution expenses | (xx) | |
| Total operating Income / loss | xx | |
| Add: Other Income and gains: | ||
| Interest received | xx | |
| Dividend received | xx | |
| Discount received | xx | |
| Commission received | xx | |
| Gain on sale of fixed assets | xx | |
| Gain on redemption of debenture | xx | |
| Less: Other losses & expenses: | ||
| Interest expenses | xx | |
| Loss on sale of fixed assets | xx | |
| Loss on redemption of debenture | xx | |
| Net profit before tax (NPBT) | xx | |
| Less: Tax expenses | xx | |
| Net profit after tax (NPAT) | xx |
(Note: the source presents this format with generic "xx" placeholder amounts, i.e. as a blank skeleton to be filled with the values of a given problem; no illustrative figures are attached to this format page in the source.)