Business Finance · Chapter 2
Study notes aligned to the official NEB syllabus.
Once a firm has carried out its transactions over a year, it must summarise what it owns, what it owes, how much it earned and how cash moved. This summary is done through financial statements, and the wider process of communicating this information to owners, lenders, the tax office and the public is called financial reporting. For the financial manager these statements are both a scorecard of the past and the starting data for every future decision, so a clear understanding of what each statement contains is essential.
Financial statements are the formal records of the financial activities and position of a business. They are prepared at the end of an accounting period, usually one year, and are meant to give a true and fair view of the firm's performance and position to those who have an interest in it. In Nepal listed companies prepare these statements under the Nepal Financial Reporting Standards (NFRS).
A complete set of financial statements normally has four parts, supported by explanatory notes:
These rest on some basic accounting concepts: the going concern assumption that the firm will continue in business, the accrual basis by which revenue and expense are recorded when earned or incurred rather than when cash moves, consistency in the methods used from year to year, and prudence, which requires that losses be anticipated but gains not overstated. The users of these statements include shareholders, potential investors, lenders and banks, management, employees, government and tax authorities, and the general public, each looking for different information from the same set of accounts.
The balance sheet is a statement of the firm's financial position at a single moment in time, usually the last day of the accounting year. It is built on the fundamental accounting equation:
$$ \text{Assets} = \text{Liabilities} + \text{Shareholders' Equity} $$
The two sides must always be equal, which is why it is called a balance sheet. Its contents fall into three groups.
Assets are the resources owned by the firm that are expected to give future benefit. They are split into non-current (fixed) assets such as land, buildings, plant and machinery, and long-term investments, and current assets such as inventory, accounts receivable (debtors), marketable securities, and cash and bank balances. Fixed assets are shown at cost less accumulated depreciation.
Liabilities are the claims of outsiders against the firm, the money it owes. They too are split into non-current liabilities such as long-term loans, debentures and bonds, and current liabilities such as accounts payable (creditors), short-term bank overdrafts, outstanding expenses and taxes payable within a year.
Shareholders' equity (owners' equity) is the residual claim of the owners after all liabilities are met. It contains the paid-up share capital (common and preferred), the reserves and surplus, and the retained earnings accumulated from past profits. To apply the balance sheet is simply to arrange these items so that total assets equal total liabilities plus equity, and then to read from it the firm's liquidity, its asset structure and how it is financed.
Once a firm has carried out its transactions over a year, it must summarise what it owns, what it owes, how much it earned and how cash moved. This summary is done through financial statements, and the wider process of communicating this information to owners, lenders, the tax office and the public is called financial reporting. For the financial manager these statements are both a scorecard of the past and the starting data for every future decision, so a clear understanding of what each statement contains is essential.
Financial statements are the formal records of the financial activities and position of a business. They are prepared at the end of an accounting period, usually one year, and are meant to give a true and fair view of the firm's performance and position to those who have an interest in it. In Nepal listed companies prepare these statements under the Nepal Financial Reporting Standards (NFRS).
A complete set of financial statements normally has four parts, supported by explanatory notes:
These rest on some basic accounting concepts: the going concern assumption that the firm will continue in business, the accrual basis by which revenue and expense are recorded when earned or incurred rather than when cash moves, consistency in the methods used from year to year, and prudence, which requires that losses be anticipated but gains not overstated. The users of these statements include shareholders, potential investors, lenders and banks, management, employees, government and tax authorities, and the general public, each looking for different information from the same set of accounts.
The balance sheet is a statement of the firm's financial position at a single moment in time, usually the last day of the accounting year. It is built on the fundamental accounting equation:
The two sides must always be equal, which is why it is called a balance sheet. Its contents fall into three groups.
Assets are the resources owned by the firm that are expected to give future benefit. They are split into non-current (fixed) assets such as land, buildings, plant and machinery, and long-term investments, and current assets such as inventory, accounts receivable (debtors), marketable securities, and cash and bank balances. Fixed assets are shown at cost less accumulated depreciation.
Liabilities are the claims of outsiders against the firm, the money it owes. They too are split into non-current liabilities such as long-term loans, debentures and bonds, and current liabilities such as accounts payable (creditors), short-term bank overdrafts, outstanding expenses and taxes payable within a year.
Shareholders' equity (owners' equity) is the residual claim of the owners after all liabilities are met. It contains the paid-up share capital (common and preferred), the reserves and surplus, and the retained earnings accumulated from past profits. To apply the balance sheet is simply to arrange these items so that total assets equal total liabilities plus equity, and then to read from it the firm's liquidity, its asset structure and how it is financed.