UNDERSTANDING THE RELATEDNESS OF FINANCIAL STATEMENTS OF AN ORGANISATION: A USEFUL TOOL IN PERFORMANCE EVALUATION.

The information content of the Four Financial Statements, namely 

• The Statement of Profit or Loss and Other Comprehensive Income,
• The statement of Financial Position,
• The statement of Changes in Equity, and
• Statement of Cash Flows

are quite interrelated and are vital tools that help me as a business owner to have a direct insight into the financial position of my business.

Firstly, the Statement of Financial Position or Balance Sheet of the Organization provides me with a summary snapshot of the resources or assets available to the company and all the sources of these resources (liabilities or owner equity) at a specific date. This is quite different from the other statements that consider a range in time. It derives its name from the Accounting Equation which states that the Assets of a Company (or what the company owns) will always equal the sum of its liabilities (what it owes) or mathematically expressed: 

Assets = Liabilities +  Owners’ Equity. 

With this, I can ascertain with confidence, if my organization is liquid and can meet its short and long-term obligations.

The Statement of Profit or Loss and Other Comprehensive Income on the other hand presents me with a summary of the revenues, expenses, and the net income considered over a spell of time. With this, I can show the profitability or otherwise of the organization to stakeholders for that specific period.

The Statement of Changes in Equity highlights all the changes that would have occurred regarding the company’s equity over a specific time. This will include all the contributions made by the owners, net incomes, dividends paid or to be paid to shareholders, and any other transactions that will impact equity. This information is crucial in helping to grasp or comprehend how the ownership of the company has metamorphosed over the given period.

The Statement of Cash Flows essentially helps me to keep up with the movements of cash in and out of the company during a period. These cash movements can be indexed under Financing; Operating and Investingactivities and with this my organization can evaluate its capability to generate cash as well as have a good comprehension of the effectiveness of its cash management procedures, policies, and practices. 

The interrelatedness of the above statements is vital because it helps to transfer meaning and generate valuable information to be used from one statement to the other essentially.

For example, the information generated from the Statement of Cash Flows is useful for the harmonization of cash and cash equivalents which would in turn be used to report accounting activity in both the Statement of Profit or Loss and Other Comprehensive Income and the Statement of Financial Position.

Since most income or expenses generated by the company directly affect the owners’ equity of the company as net income, it would then be expected that the activities from the Statement of Profit or Loss and Other Comprehensive Income would have an impact on both the Statement of Financial Position and Statement of Changes in Equity of the firm so I will always look out for that.

The usefulness of these financial statements cannot be overstated. Firstly, our organization can use them to compare performance across different periods, and with this comparison, we can make more informed decisions that could have a strategic impact since they are backed by the evidence of numbers. Further to this, we can make more accurate projections for the future for budget and planning based on the trends spotted. The trends can also assist us to easily identify areas of promise or opportunity as well as spot problem areas in the business and mitigate or hedge against them if unavoidable. In addition, 

Additionally, the financial health of the company can be measured to ascertain its continued viability as well as for investment decisions for prospective investors into the business.

With the above tools at our disposal, our business performance would be certainly and greatly enhanced, and its long-term growth and well-being guaranteed.

Some useful concepts that I have gained far in the Corporate Financial Accounting Course are outlined below although not exhaustive: 

1. A business transaction qualifies as an accounting transaction when there is an exchange of value evidenced by proof of the transaction (e.g., sales agreement, invoice, cheque, bank alert, etc.). This is the distinction between accounting transactions and business transactions.
2. The resources available to a business are equal to the sources or 
   1. Assets = Capitals The fundamental accounting Equation is derived from the above statement but further breaks down the capitals to show the sources of such capitals to an organization:
   1. Assets (A)= Liabilities (L) + Owners Equity (OE)
3. The Entity concept states that for Accounting Purposes; The company is separate from its owners. As such, the legal structure of the company must be understood to know the impact of accounting transactions on the balance sheet or other statements. These will include sole proprietorships, partnerships, limited liability companies and Public Liability Companies. Understanding these entity concepts will be key to understanding their impact on the financial statements of each respective company in these categories.
4. Money measurement concept: Financial Accounting always measures items for the balance sheet and other financial statements in terms of money value. This means that all items in the accounting statements must be reduced to their monetary value to be qualified and subsequently recorded as accounting events.
5. The dual aspect of accounting or the double entry system states that every accounting transaction would affect at least 2 accounts in opposite directions ensuring that the accounting equation remains in balance. Such effects would include increases or decreases in Assets, Liabilities or Owners’ Equity Accounts or a combination of these accounts. Accounting transactions can either reduce Assets, Liabilities or Owners’ Equity, or a combination of these.