Explanation
Financial statements are written records of a business's financial situation. They include standard reports like the balance sheet, income or profit and loss statements, and cash flow statement. They stand as one of the more essential components of business information, and as the principal method of communicating financial information about an entity to outside parties. In a technical sense, financial statements are a summation of the financial position of an entity at a given point in time.
The primary focus of financial reporting is information about earnings and its components. Hence financial statement do not consider assets and liabilities expressed in non-monetary terms.
The difference between the cost price and the invoice price of goods is known as Loading. Here, the invoice value of the goods is Rs. 1,20,000 and the profit on cost is 20%. So, the cost = Rs. 1,20,000/120 x 100 = Rs. 1,00,000. Therefore, the loading amount = Rs. 1,20,000 – Rs. 1,00,000 = Rs. 20,000.
Interest paid on debenture is a liability and it is fixed in nature. In case of dividends it is not fixed in nature to pay. Dividends are appropriation of profits earn by the company on the other hand debenture is a long term liability of a company and its interest is expense not appropriation of profits.
A deferred credit could mean money received in advance of it being earned, such as deferred revenue, unearned revenue, or customer advances. Deferred revenue refers to payments received in advance for services which have not yet been performed or goods which have not yet been delivered. These revenues are classified on the company's balance sheet as a liability and not as an asset.
Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which show the financial position of business concern in an organised manner.
Some of limitations of financial statements are as follows
Accounting information is sometimes based on estimates which may be unrealistic.
Window dressing may lead to faulty results. Window dressing means manipulation of accounts and Show easy picture of financial statements
Accounting ignores the effect of price level changes. Transactions recorded on historical cost. Examples, fixed assets recorded at historical cost.
Accounting information can be manipulated and thus cannot be considered as the true test of performance.
Accounting information may be Biased accounting information is not without personal influences or bias of accountant.
A financial statement is a collection of data organized according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm.
Retained earnings are affected by any increases or decreases in net income and dividends paid to shareholders.
As a result, any items that drive net income higher or push it lower will ultimately affect retained earnings.
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