Financial statements of an organization is the basis of data required for financial decision making.

As such, correct understanding of the structure of financial statements and also of the tools available for the interpretation of financial statements is a must before one talks of any of the further discussions on financial management.

Any organization doing the business, whatever it is manufacturing activity or trading activity or service activity, is interested in knowing basically two

facts about the business.

a. Where the business stands at any given point of time in financial terms. b. What is the result of operations carried out by the business organization during a specific period. In order to answer these questions, the organization carries out the process of recording various transactions in a defined set of records, technically referred to as accounting which effectively result into the preparation of what are called as financial statements.

These Financial Statements Are:

a. First financial statements is balance sheet. This is the answer to the first question viz. where the business stands in finance terms. Balance sheet informs about the various sources used by the organization to raise the funds which technically result into what are referred as Liabilities and the way these sources are used which technically result into the creation of the Assets. Sometimes, balance sheet is also referred to as statement of sources and application of funds. Effectively, balance sheet is a listing of various assets and liabilities of the organization at any given point of time. Technically, balance sheet is a position statement in the sense it refers to a particular date. As such, balance sheet is referred to as Balance sheet as on ________ or Balance Sheet as at _______

Cont
b.
Second financial statement is profitability statement. In technical language. It is referred to as Profit & Loss Account. This is the answer to the second question. What is the result of operation of the business during the specific period i.e. whether the operations have resulted into a profit or loss and by what amount. Technically, profitability statement is a period statement in the sense it refers to a particular period. This may be a month, a quarter, a half year

depending upon the organization and purpose for which it is prepared.

As such, profitability statement is referred to as Profit and Loss Account for the year ending on___

Structure of Financial Statement

As there is no specific law applicable to the preparation of financial statements of a non-corporate organizations like proprietary firms or partnership firms, these organizations can prepare their financial statements in whatever structure they want. However, in case of a corporate organization, in simple language a company form of organization, there is a uniform law applicable to these types of organizations viz. Companies Act. 1956. As such a company form of organization is required to prepare and present its financial statements in accordance with the provision of Companies Act. 1956. to be more specific as per the provisions of schedule VI of the Companies Act 1956. the underlying presumptions of the schedule VI provisions is that it is through the financial statements that the companies communicate with the various outsiders. As such, it is required that the financial statements should be as transparent and as an informative as possible. Hence, schedule VI lays down various disclosure requirements which the companies are required to follow while preparing their financial statements.

Schedule VI
Schedule VI of the Companies Act, 1956 is subdivided into four parts: Part-I Deals with the format of the Balance sheet. Part-II Deals with the Profit and Loss Account. Part-III Deals with notes forming part of the P&L A/C. and the balance sheet. The last reporting requirement to Part VI was interested recently with the effect from 15th May 1995 which deals with Balance Sheet abstract and the companys general business profile.

Part-I Structure of Balance Sheet

As stated above, Part-I of Schedule VI deals with balance sheet, though in normal circumstances we come across vertical form of Balance Sheet.

Liabilities a. Share Capital b. Reserves & Surplus c. Secured Loans d. Unsecured Loans e. Current Liabilities and Provisions

Assets a. Fixed Assets b. Investments c. Current Assts, Loans& Advancesns d. Misc. Expenditure e. Profit & Loss a/c debit Balance

1) Authorized Capital 2) Issued Capital 3) Subscribed Capital 4) Paid-up Capital

Reserves 1) Subsidy Received From The Govt 2) Development Rebate reserve 3) Revaluation of fixed assets 4) Issue of Shares at Premium 5) General Reserves Surplus The credit balance in profit and loss account

a. b. c. d.

Debentures Loans and Advances From Banks. Loans and advances From subsidiaries. Other Loans and advances.

a. Fixed Deposits. b. Loans and Advances From subsidies. c. Short Term Loans and Advances i) From Subsidiaries ii) From Others d. Other Loans and Advances i) From Subsidiaries ii) From Others

a. b. c. d. e. f. g. h.

Goodwill Land Buildings Plant & Machinery Furniture fittings Patents, Trade Marks and Designs Vehicles etc.

a. Investments in Govt. or Trust securities. b. Investments in shares, debentures or bonds. c. Investment in Capital of Partnership firm

 Raw materials, work-in-progress, finished goods, spares and consumables Sundry debtors and receivables < 6 mths Advances paid to suppliers of raw materials Cash and bank balances Interest receivables Other current assets such as Government securities, Bank deposits ..etc

Tax disputes Legal litigations Bills and cheques discounted with banks Claims against the company not acknowledged

Ratio analysis is one of the powerful tools of financial analysis. It indicates a quantitative relationship between the figures and group of figures which are used for

Evaluation And Decision Making.

Ratio is a simple mathematical expression of

relationship between two related items in quantitative

form. It may be a number expressed in terms of another number. The relationship between two figures may be expressed as Quotient A Rate Percentage

In assessing the financial stability of a firm, a management should, apart from profitability, be interested in relative figures rather than in absolute figures.

Ratios can be directly helpful as a basis for making predictions.

A ratio is a mathematical relationship between two quantities. To evaluate financial condition and the purposes of a firm, the financial analyst needs certain yardsticks. Such yardsticks frequently used is a ratio. The ratios are not only helpful to those who manage company but also its shareholders and creditors to know about financial position and the earning capacity of that concern.