May 22, 2023

Preparation of Financial Statements


Preparation of Financial Statements

Preparation of Financial Statements

The preparation of financial statements involves the process of organizing and presenting a company's financial information in a structured way. Financial statements provide an overview of a company's financial performance, position and cash flows. Basic financial statements include the balance sheet, the income statement, the statement of cash flows, and the statement of changes in equity. Here is an overview of each statement and the steps involved in their preparation;

1. Balance Sheet:

A balance sheet provides a snapshot of a company's financial position at a specific point in time, usually at the end of a fiscal period.

Assets (such as cash, accounts receivable, inventory, property, and equipment), liabilities (such as accounts payable, credits, and other obligations), and shareholders' equity.

The preparation of the balance sheet involves all the assets, liabilities, and equity of the listed accounts, and as such the equation ASSETS = LIABILITIES + EQUITY holds true.

2. Derivative Statement:

The income statement, also called profit and loss or statement of operations, presents the sum of income, expenses, gains and losses over a given period of time.

It shows a company's financial performance by calculating net income (or net loss) as the difference between income and expenses.

The preparation of the income statement involves reconciling the income earned and deducting the expenses incurred at the time.

3. DE cash flows:

A statement of cash flows provides information about the inflows and outflows of a company's cash over a period of time, categorizing them into operating, investing, and operating activities.

It identifies the sources and uses of funds and helps assess the ability to generate and manage cash.

Preparing a statement of cash flows will analyze changes in the financial balance using information from the statement, balance sheet, and other relevant records.

4. On Changes In Equity:

A statement of changes in equity over time shows changes in shareholders' equity, showing movements in equity accounts such as common, retained earnings, and comprehensive income.

   It reflects transactions such as additions, dividends, net income or loss, and changes in accounting policies.

Preparing a statement of changes in equity involves examining the changes in the equity accounts and presenting them in a clear and understandable form.

In addition to the aforementioned financial statements, the accompanying notes and disclosures may be included for further details and explanations of the proposed numbers. It is important to follow accounting standards and principles, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), when preparing financial statements for accuracy, comparability and transparency.