Why the financial statement is required in a business or in a firm
The types of financial statements and the reason for preparing them
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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.