• University of San Francisco

• ECON MISC

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS Unit Structure: 1.0 Objectives 1.1 Introduction 1.2 Purposes and Objectives of Financial Statements 1.3 Nature of Financial Statements 1.4 Characteristics of Financial Statements 1.5 Qualities of Ideal Financial Statements 1.6 Preparation of Financial Statements 1.7 Vertical Financial Statement Statements of a Proprietor 1.8 Vertical Statements for Companies 1.9 Exercise 1.0 OBJECTIVES After studying the unit the students will be: Know the purpose and objectives of Financial Statements. Understand the nature of Financial Statement. Explain the Characteristics of Financial Statement. Know the qualities of Ideal Financial Statement. Explain the Vertical Format of Financial Statements. 1.1 INTRODUCTION Government legislations require certain organizations like limited companies, public utilities, and co-operative to maintain proper account and draw financial statement. Public can understand from the financial statement the extent to which a company is discharging its social responsibilities. While issuing shares bonds, financial statement become necessary as prospective investors can judge whether to by the share or bonds, from the information regarding the financial soundness, gathered from the financial statement. Workers union may study the financial statement and ascertain whether they can enforce their demand. Whiten an organization also, financial statement assist the 2 management in taking various decisions. Consumer, all over the world, are becoming increasingly aware of their right and are using financial statement extensionally today to find out the degree of exploitation by the industries. Tax legislature makes it obligatory on the part of business entities to draw fair and objective financial statement. The financial statement serves as instruments to regulate equity and debentures issued by companies. 1.2 PURPOSES AND OBJECTIVES OF FINANCIAL STATEMENTS Financial statements are very useful as they serve varied affected group having a economic interest in the activities in the business entity. Let us analyse the purpose served by financial statement. a) The basic purpose of financial statement is communicate to their interested users, quantitative and objective information are useful in making economic decisions. b) Secondly, financial statements a