What is General Purpose Financial Sttements?
General-purpose financial statements are the financial statements that are issued by the management at regular intervals, usually, monthly, quarterly, semi-annual, and annual basis. Such statements help investors and creditors interpret the business and financial condition of the company so that they can take informed investment decisions.
Types of General Purpose Financial Statements
Below are the types of general-purpose financial statements, i.e. cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities., income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements., balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., statement of owners equityStatement Of Owners EquityA statement of owner's equity is a financial statement that shows how the entity's shareholder's capital has changed over time (reflecting additions and subtractions of equity due to business transactions). When a corporation generates a profit, it raises the owner's equity; when it makes a loss, it depletes the owner's equity. or retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company..
#1 – Cash Flow Statement
- The statement of cash flows describes how a company’s cash inflows and outflows change the company’s cash balance from the beginning of the year to the end of the year. The types of cash flows that cause the cash balance to change are classified into the following three activities, operating activitiesOperating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production., investing activities, and financing activitiesFinancing ActivitiesThe various transactions that involve the movement of funds between the company and its investors, owners, or creditors in order to achieve long-term growth are referred to as financing activities. Such activities can be analyzed in the financial section of the company's cash flow statement..
- Cash flows fluctuations can be easily traced, thereby controlling the expenditure on unnecessary items and investment in a profitable manner.
Format of cash flow statement given below:
- + / – Operating cash inflows
- + / – Investing cash inflows
- + / – Financing cash inflows
Change in cash flows
- + opening cash balance
- = closing Cash balance
#2 – Income Statement
- The Income Statement indicates a business’s profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance. for a given period of time. By this statement, investors can estimate their return on their investments.
- It is also called a profit and loss account. This statement takes into account all revenue expenses and incomes & required provisions are created for meeting future obligations that have probable nature of occurring losses.
- Based on this statement, the share of profit attributable to the investors is decided by the management according to the investment made by individual investors.
Basic income statement equation is:
Net Incomes = Revenue – Expenses
#3 – Balance Sheet
The Balance Sheet indicates at a given point of time how a company effectively used its resources. It shows all assets and liabilities at the given point of time.
An accounting equationAccounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. in the balance sheet is given below:
Assets = Liabilities + Shareholders Equity
#4 – Statement of Shareholder Equity or Statement of Retained Earnings
The statement of shareholder equity indicates how the shareholders’ ownership in the business, known as shareholder equity or stockholder equity, increased or decreased from the beginning to the end of the given accounting period. As per US GAAP, official term to be used for this statements is a statement of shareholder equity
The statement of shareholder equity equationShareholder Equity EquationShareholder's equity can be calculated by deducting the total liabilities from the total assets of the company. It is a business's net value, or the amount that shareholders can claim if the company is liquidated and its debts are repaid. is:
Beginning Shareholder Equity + Additions to Shareholder Equity – Deductions from Shareholders Equity = Ending Shareholders Equity
- Detect Patterns in Market – Financial statements show the market position where it will be identified based on sales fluctuations from period to period. By this management can take necessary steps to improve its standards by employing efficient marketing personnel who suggests product sales improvement.
- Budget Preparation – Financial statements are used for future planning, and decision making is that they show the company’s budgets. There will be estimations and accordingly fix the limits of expenses to be spent in a particular period for a specific project. There are different types of the budget like flexible budgetFlexible BudgetA flexible budget refers to an estimate which varies with the change in production activity or volume. Such a budget is more realistic and flares the managerial efficiency and effectiveness as it sets a benchmark for the actual corporate performance., expenditure budget, fixed budget, etc., these types may be selected according to the need of the entity.
- Reliable – General-purpose financial statements are reliable because an audit of financial statements to be conducted at regular intervals of time, depending on the statutory obligation. For example, banks required to get their accounts audited by chartered Accountant quarterly, annually. Investors rely on financial statements without much analysis when they are audited.
- Market Demand Fluctuations – Company product demand may frequently vary according to market conditions. By this irregular market fluctuations, sales will have a direct impact. During inflations, sales will have an adverse effect.
- A One-Time Analysis – Financial statements show how company performance at a single point in time. So we cannot compare whether it is doing well or not as compared to earlier years. But we can analyze the financial position over a period of time but not exactly during a short period of time.
This has been a guide to What is General Purpose Financial Statements. Here we discuss the types of General-purpose financial statements, objectives along with examples, advantages, and disadvantages. You can learn more about from the following articles –