Why the financial statement is required in a business or in a firm
The types of financial statements and the reason for preparing them
The shareholders, partners, employees, managers all seek the answer to three questions.
- What is the current financial position of the firm?
- How the firm has performed over a given period of time?
- What are the sources of funds of the firm and how the fund is being used?
To answer the three questions the accountant prepares three financial statements-
- Balance sheet: It provides the statement of the financial transaction of the current year or of a current quarter. It provides a snapshot of the current financial position of the firm.
- Profit and loss statement: It provides information about how the firm has performed over a given period of time.
- Cashflow statement: The cash-flow statements describe the sources of income of a firm and how the funds are being used.
Generally, two copies of each document are prepared. One for tax purposes and another for shareholders and the public.
Profit and loss statement
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