Lecture No. 3

Objectives
Understand the financial statements of manufacturing concerns

Purpose of preparing financial statements

Financial statements are prepared to demonstrate financial results to the users of financial information.  These are the reports, which are prepared by the accounting department and are used by the different people inclusive of the management. According to IASB framework:      “Financial statements exhibit its users the financial position, financial performance, and cash inflow and outflow analysis of an entity.”

Components of Financial Statements

According to IASB framework there are five components of financial statements: Balance Sheet:                                           Statement of financial position at a given point in time. Income Statement:                                      Incomes minus expenses for a given time period ending at a specified date. Statement of changes in Equity:                 Also known as Statement of Retained Earnings or Equity Statement. Cash Flows Statement:                               Summarizes inflows and outflows of cash and cash equivalents for a given time period ending at a specified date. Notes (to the accounts):                              Includes accounting policies, disclosures and other explanatory information. It is not possible for all the business entities to prepare all of the components of the financial statements, it depends upon the size, nature and statutory requirements of each of the entities that whether all components are to be prepared or not. For example a small business entity (like a washer man) does not need to prepare statement of changes in equity or notes to the accounts as the size of information is very little and not complex

Financial statements prepared by the Cost Accountant

Cost accounting department prepares reports that help the accounting department in preparing final accounts, these include; ·         Cost of goods manufactured statement ·         Cost of goods sold statement Both of the statements represent production cost function or the function of expenses that are incurred to make the goods or services available for sale. It depends upon the form of the business entity whether what should be disclosed in these statements and what should be the extent of the details to be given into these statements

Forms of business entities
Manufacturing Entities      Manufacturing entities purchase materials and components and convert them into finished goods. Costing department of these entities works very much efficiently, a complete cost accounting system is followed in manufacturing concerns in which procedures of cost accumulation, methods of product costing, process of calculating per unit cost and determining the cost of inventories are defined.                Trading Entities      Trading entities purchase and then sell tangible products without changing their basic form. Costing department of these entities is not involved in that much minute calculations and procedures. It simply has to keep records of the cost of goods purchased and cost of inventory.      Servicing Entities      Servicing entities provide services or intangible products to their customers. Costing department of these entities is also concerned with calculation of the cost of service provided. Inventory of service is also determined in this type of concerns.