These are (I) income statement or trading and Profit and Loss Account which is prepared by a business concern in order to know the profit earned and loss sustained during a specified period; (it) position statement or balance sheet which is prepared by a business concern on a particular date in order to know its financial position. 1. Income statement: trading concerns, whose financial activities are restricted to purchases and sales of goods prepare trading and Profit and Loss Account. The trading and Profit and Loss Account in order to ascertain their net income/net loss. O they prepare one more additional Account, known as the manufacturing Account. In case of Joint Stock Companies profit and loss appropriation is also prepared to show the disposal of profit earned by the company.
It furnishes the information regarding purchases, sales, direct expenses, gross profit or gross loss and net profit and net loss. 2. Position statement: it is a mirror which reflects the true position of the assets and liabilities of the business on a particular date. Assets include all current and non-current assets and the liabilities include creditors equities and proprietors’ equities. It is traditionally known as the balance sheet. Financial analysis Financial analysis is the systematic numerical calculation of the relationship of one financial fact with the other to measure the profitability, operational efficiency, solvency and the growth potential of the business.
The analysis serves the interests of shareholders, debenture-holders, potential investors, creditors, bankers, journalists, legislators, politicians, researchers, stock exchanges, taxation authorities and economists. The analysis of financial statements makes it simple, intelligible, and meaningful for all concerned parties. Financial statements are split into simple statements by the process of rearranging, regrouping and calculations of various ratios. The analysis simplifies, summarizes and systematizes the monotonous figures. Financial analysis in this way is the purposeful and systematic presentation of financial statements. Various items of income and position statements are compared and their inter relationship is established.
According to Kennedy and Mauler ” The analysis and interpretation of financial statements are an attempt to determine the significance and meaning of financial statements data, so that a forecast may be dad of the prospects for future earning, ability to pay interest and debt maturities( both current and long term) and profitability of sound dividend policy. To these statements added are the statement of retained earnings and some other statements (as fund flow statement, cash flow statement, etc. ) and schedules of fixed assets (as investments, current assets etc) to give a full view of the financial affairs. All these statements are collectively called as a package of financial statements. Statement of retained earnings (when prepared separately) or profit and loss appropriation Account shows the utilization of profits of the company I. E. , dividend declared, amount transferred to general reserve or any other reserve are shown in this Account.