What do we understand by the term ‘Financial Statement’?

According to Section 2(40) of Companies Act 2013, “FINANCIAL STATEMENT” in relation to a company, includes—

  1. a Balance Sheet as at the end of the financial year;
  2. a Profit & Loss Account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
  3. Cash Flow Statement for the financial year;
  4. a Statement of Changes in equity, if applicable; and
  5. any Explanatory Note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):

Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement.

With reference to Section 134(1) of the Companies Act, 2013 “The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the Chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the Company Secretary of the company, wherever they are appointed”

Now, let’s analyse each and every part one by one…

What is Balance Sheet?

The Balance Sheet is an important document to analyse a company’s financial strength. Unlike the income statement, which depicts a firm’s earnings and expenses over a period of time, the Balance Sheet lists all Assets and Liabilities of a company, at a given point of time, say 31st March. The balance sheet provides a snapshot of the entity at the end of a fiscal quarter or year.

There are two major sections of the balance sheet— Assets and Liabilities (including Shareholder’s Equity). It is crucial to remember that, as the name implies, the total of both sections must be equal/ balance. The asset value must equal the sum of liabilities & shareholder’s equity.

Assets are items that the company owns and uses to conduct business. Liabilities are what the company owes to others. Shareholder’s equity is essentially what is left over, similar to a company’s “net worth.” Some of assets are short-term in nature, such as cash, bank balance, whereas some assets are long term assets such as Plant & Machinery, Immoveable Property etc.  Similarly, some liabilities may be short term e.g., Trade Creditors, Current Liabilities etc. Some of the liabilities may be of long term in nature e.g., Bank Loan etc. The difference between your assets and liabilities is your net worth, which is equivalent to a company’s equity.

What is Income Statement?

The Income Statement presents the financial results of a Company over a specified period of time, typically one year. The income statement presents the revenue (“sales”) generated during the period, the expenses incurred and the profit earned. The basic equation underlying the income statement is:

Revenue – Expenses = Profit/loss

Typically, the income statement will provide the revenues followed by the cost of goods sold, the difference of which is the gross profit. Selling, general and administrative (SG&A) and other operating costs are then deducted to reach the Operating Income. Non-operating income and expenses, or the income and expenses that are not essential to operations, are then deducted to reach Net Profit. The statement is meant to be read from top to bottom, from total income revenue to net income. Thus, total revenue is often referred to as the “top-line” figure and net income as the “bottom-line” figure.

What is Cash Flow Statement?

Cash flow from operating activities has a very simple objective—to show whether a firm’s day-to-day operations generated or depleted cash. If net cash flow from operations is negative, it means that the company is spending more cash than it is generating in producing and selling its goods and services. If it is positive, then the Company is generating more cash than it is spending on its day-to-day operations. Needless to say, cash flow from operations is vital. Negative cash flow from operating activities will eventually lead companies to seek funding from outside sources, either through increased debt load—which increases interest payments, hinders growth and makes the company more vulnerable to business down turns. Although a rapidly growing company may have negative operating cash flows as it expands its inventory and pays its increasing bills, the cash flow from operating activities must eventually turn positive for the firm to survive.

What is the process of finalisation of Financial Statements?

  • After the closure of the financial year, financial statements are updated by the accountants of the company in the supervision of management and Board of Directors of the company.
  • After that, Financials are sent to the Board of Directors for its signing and as per sec 134 of the Companies Act, 2013, following persons are authorized to sign the financials:
  • The Chairman of the company where he is authorized by the Board or
  • By two directors out of which one shall be the Managing Director if any,
  • The Chief Executive Officer, The Chief Financial Officer and the
  • Company Secretary of the company, wherever they are appointed, or
  • In the case of a One Person Company, only by one director, for the submission to the Auditor for his report thereon.
  • After the signing of the Management (as mentioned above), the Financials are audited by the Statutory Auditors of the Company.
  • After the Audit, those Audited financials are adopted by the Members in the Annual General Meeting of the company.

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