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Financial accounting

Main Components of Financial Statements and the Processes Used by Large companies to

Complete Financial Statements.

Financial accounting is a process that involves the classification and subsequent recording of
monetary transactions of a particular entity for a defined period of time and in accordance with
the principles and the established processes accounting concepts. The major components of
financial information in a private company or public corporation are; the statement of financial
performance, the statement of financial position, cash flow statement, the statement of changes in
the shareholders equity and the accompanying notes (Bodie, Kane & Marcus, 2008).
The statement of financial performance provides the information on revenue expenses and
income. The other expenses including the depreciation, insurance, penalties and fines are
recorded in this document. It’s also known as the profit & loss account or the income statement.
The statement of financial position also known as the balance sheet records all the assets and
liabilities of a company for a particular period. The objective of the statement of financial
position is to provide the financial position at a given date of an entity. The report shows the total

Main Components of Financial Statements 2
assets and the claims or liabilities of the entity. It’s like a status report that shows a snap shot of
the company’s financial position (Ehrhardt & Brigham, 2008).
The cash flow indicates the use and application of funds as at a particular date. It summarizes all
the cash transactions in a company for a defined accounting period while classifying them along
three classes, cash flows from operations, financing and investing activities. It shows the
movement of cash, that is if it’s cash out flow or inflow. However, the use of the term cash also
refers to cash equivalents while its major application is in gauging the liquidity, solvency and the
quality of earnings in a business (Obaidulla, 2013).
The statement of shareholders equity is a statement that provides a written summary of all the
financial changes in the shareholders equity over a financial period. The statement reconciles an
entity’s opening balances of the equity accounts and its closing account balances. There are two
types of changes that affect the cash flow. The changes that emanates from the shareholders’
transactions such as the issue of new shares or payment of dividends and the other is from the
performance of the business such as the changes in net income, comprehensive income,
revaluation of assets or the changes in fair value of cash equivalents or securities that are
available for sale (Obaidulla, 2013).
To complete the accounting processes, the figures obtained from the statement of financial
performance known as surplus/ profits, Loss/ deficit is entered in the balance sheet to obtain the
total equity. The other financial components that were part of the trial balance such as the
debtors, creditors, inventory, assets and liabilities are entered on the company’s statement of
financial position to reveal the status of the company’s financial position (Kieso, Weygandt &
Warfield, 2007).

Main Components of Financial Statements 3
The cash flow is also prepared from the same documents with special focus on the movement of
cash and they are classified depending on their application that’s if they were part of financing or
investing and whether they represented cash in-flows or out-flows (Ross, Westerfield & Jaffe,
The statement of changes in shareholders equity classifies the equity components in the
following ways;
Common stock represents the company’s legal capital and which equals the total product of the
issued shares and the value per share. The additional capital, together with the share premium is
also included in the statement of changes in share holders’ equity. The other components are the
capital reserves, treasury stock, retained earnings, payment of dividends and other gains or losses
that may have been gained (Garrison, Noreen & Brewer, 2009).
Several financial concepts are applied when compiling financial reports and which are subject to
the decisions of the accountants. The concept of prudence is critical to the accuracy of
accounting records. When recording financial transactions, there are other events that may seem
uncertain but they have to be recorded. Bad debts that are obviously hard to recover should be
provided for by creating appropriate provisions to cushion the company against losses in future.
Prudence concept in accounting ensures that assets or earnings are not overstated while liabilities
and expenses are not understated. The major disadvantage is that are different methods of
valuing and estimating provisions and which largely depend on the discretion of the accountant.
When valuing stocks for instance accountants can decide whether to apply the LIFO (last In First
Out), FIFO (First In First Out) methods or the historical methods. However, the consistency
concept in accounting holds that the methods chosen should be consistent from one accounting

Main Components of Financial Statements 4
period to the next and if there is need for change then clear explanations should be given
(Hermanson, Edwards & Invacevich, 2011).
The principal of going concern implies that business entities should be assumed to be continuing
in business for the foreseeable future. Appropriate depreciation should be provided on assets that
the company has but they should not be excessive. The accounts should be prepared in a prudent
way and the revenues should be recognized when they are earned and not when cash has been
paid while liabilities should also be acknowledged when they have been incurred. Materiality
concept asserts that when financial records are prepared, only major events that can affect the
outcome or influence financial decisions should be included in the financial statements minor
events should be ignored. Cut off procedures should be exercised diligently and the financial
reporting period should be adhered to. All the financial records should also be based on
verifiable evidence and where possible audit trail should be available.

Main Components of Financial Statements 5
Bodie, Z., Kane, A., & Marcus, A. J. (2008). Investments (7th International ed) Boston:
McGraw-Hill. 303.
Ehrhardt, M., Brigham, E. (2008) Corporate Finance: A Focused Approach (3rd ed.) p.131
Garrison, R. H., Noreen, E.R. & Brewer, P.C. (2009) Managerial Accounting , McGraw-Hill
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011) Accounting Principles: A Business
Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007) Intermediate Accounting (12th ed.)
Hoboken, NJ: John Wiley & Sons, p. 1320.
Obaidulla, J. (2013) Statement of Changes in Shareholders Equity retrieved November 9, 2015
from Accountingexplained
Obaidulla, J. (2013) Statement of Cash Flows retrieved November 9, 2015
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013) Corporate finance (10th ed.) New York, NY:
McGraw-Hill Irwin.

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