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Financial statements
Financial statements (or financial reports) are a record of a business'
financial flows and levels.
Typically they will include:
a balance sheet setting out the net asset position of a business
an income statement, income and expenditure statement or profit
and loss account
a cash flow statement
a statement of other recognised gains and losses or other comprehensive
income statement setting out movements in equity that do not go
through the income statement or profit and loss account (eg a revaluation
of the value of head office of a manufacturing company)
statement of retained earnings
supplementary notes and management discussion
Today most governments require publicly-traded companies to issue,
and issue in a certain way, annual financial statements. Some governments,
such as the United Kingdom government, require all companies to
publish annual financial statements, although smaller companies
only need publish them in abbreviated form.
Contents of this Article
1 History
2 Financial condition
3 Promotion
4 Audit
5 System
6 Standards and regulation
7 See also
8 External links
8.1 Guides
History
Financial statements and records have been produced for as far back
as there has been human writing. The people in the old Mesopotamian
societies operated both insurance and credit (see interest) corporations,
and had the obvious need of record keeping.
Financial condition
Each statement presents financial data relating to a company's or
a group's current financial health, business results for the previous
period, and other indicators that are used by the company's stakeholders
to assess the health of a company. Typically a company's stakeholders
will include existing and prospective shareholders, employees and
trades unions, the taxation authorities, banks, suppliers and customers.
Usually the most broad requirement is that financial statements
should be true and fair. This has not always been the case in the
past: for instance, in the UK the requirement used to be true and
correct.
Promotion
To entice new investors, most public companies assemble their financial
statements on fine paper with pleasing graphics and photos, attempting
to capture the excitement and culture of the organisation in a "marketing
brochure" of sorts.
Audit
Although the rules differ between jurisdictions, usually larger
companies, and all publicly-quoted companies must have their financial
statements independently audited. Note that the auditors do not
certify financial statements, that is done by the company's directors.
All an auditor does is examine the financial statements and records
of a company and opines on whether they do indeed show a "true
and fair" view (or meet other particular requirements that
the auditor is engaged to opine on).
There has been much legal debate over who an auditor is liable
to. Since audit reports tend to be addressed to the current shareholders,
there is little doubt that they owe a legal duty of care to them.
In the UK, they have been held liable to potential investors when
the auditor was aware of the potential investor and how they would
use the information in the financial statements. Nowadays auditors
tend to include in their report liability restricting language,
discouraging anyone other than the addressees of their report from
relying on it. Liability is an important issue: in the UK, for example,
auditors have unlimited liability.
System
Financial statements can also be representations of business structures
as recorded in a double-entry book-keeping system, and are used
to support internal record-keeping and decision-making. While businesses
are not obligated to use this format internally, most do keep its
basic structure because it is well-understood by employees and well-supported
by information systems. In this format, businesses view their financial
condition in terms of assets, liabilities, and equity. Transactions
consist of debits and credits.
Standards and regulation
To ensure that financial statements prepared by different companies
can be adequately compared, they must be prepared according to certain
rules. Countries under the common law legal system usually follow
guidelines set in generally accepted accounting principles ("GAAP").
National accounting bodies in each country have developed their
own specific sets of accounting principles. The most common internationally
GAAP are U.S. generally accepted accounting principles and UK generally
accepted accounting principles.
Different countries have developed their own accounting principles
over time, making international comparisons of companies difficult.
Recently there has been a push towards standardising accounting
rules made by the International Accounting Standards Board ("IASB").
IASB develops International Financial Reporting Standards that have
been adopted by Australia and the European Union (for publicly-quoted
companies only), are under consideration in South Africa and other
countries. The United States Federal Accounting Standards Board
has made a commitment to converge the US GAAP and IFRS over time
[1].
Soflex Online is a supporter of Wikipedia.
From Wikipedia, the public domain free encyclopedia.
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