The main purpose/objective of this research is to understand the concepts of financial sets of the organization. This report discusses briefly the financial reports and why the financial reports have huge importance for the organizations. The financial statements are the documents which the organizations create for providing information about the financial position of the organization. The accounting reports are prepared according to the set accounting and financial standards, such as IFRS and GAAP. The financial statements follow a format and consist of different components.

In the report, different constituents of the financial statements are discussed in detail. There are three financial key that focused of eth reports that is also the balance sheets, cash flow statement, income statements . The components of each statement are discussed deeply in the report. Apart from component the report has discussed the limitations of the financial statements as well. It is evident those financial statements provide brief information but if the statement is not analyzed critically than the financial statement can be misleading. In the paper, the objectives of the financial statements, along with the persons who use financial statements, are also described in detail.

Discussing the components of financial Statement

The organizations create financial statements for providing financial information to its stakeholders. The purpose of the financial statements, to provide the data regarding to the financial performance of the organization with the specific periods. There are three financial key that focused of the reports that is also the balance sheets, cash flow statement, income statements which is verify the changes in the equity and also notes the financial statements. The financial statements follow a format and consist of various components that provide financial information regarding various financial activities. The following are the main constituents of the financial statements in detail:

Profit & Loss Statement or Income Statement:

For the corporation the income statement is the significant for the financial statements. Loss and profit statements are also called the income statements. The income statements provide the detailed information regarding to the loss and profits for an organization in the specific period’s. In the income statement, the revenue of the organization is presented from which all the expenses operating & non-operating are subtracted for determining the profitability of the organization. The income statement is usually used for financial modeling and corporate finance. The key components of the income statement include revenue, gross profit, operating expenses, taxes, etc. The key components of the income statements are explained in detail as follows (Cooper, et al., 2012).

Sales/Revenues of the components of financial Statement

The revenue is the amount which the organization records by conducting the sales or providing services to their customers. The amount of revenue includes the costs which are incurred in the selling of the products or services to the clients. The large organization can have different revenue stream which they add up in the total revenue

Cost of Goods Sold (COGS) of the components of financial Statement

The COGS (Cost of Goods Sold) are the expenditures that are directly associated with providing the goods & services to the customers. Usually, this name is mentioned in the income statement if the organization is a service providing corporation. The costs which are included in COGS include material cost, labor, and other expenses.

Gross Profit Margin (GPM) of the components of financial Statement

The gross profit is the amount that is evaluated after removing the cost of goods sold (COGS) from the revenue amount. The gross profit shows the amount of revenue exclusive of direct costs associated with selling the goods/services (Fridson & Alvarez, 2011).

Marketing Expenses of the components of financial Statement

After the gross profit section, the expenses are contained within in the profit & loss statement. The marketing, promotion and advertisement expenses are considered similar expenses; that is why they are included in the same head as marketing and advertisement expenses (SINHA, 2012).

General & Administrative Expenses of the components of financial Statement

The administrative & general expenses include the indirect expenses incurred in the organization. The general and administrative expenses include wages, rent, salaries, office expenses, travel expense insurance expenses, etc. The depreciation & amortization sometimes also included in this section; however, the organization has the option to mention the amortization and depreciation separately.

(EBIT)Earnings before interest Tax of the components of financial Statement

From the profit gross after submitting all the indirect and direct expenses, the EBIT is calculated. Because it is also includes the interest amounts, that is subtracted for the upcoming sections of the income statements

Income after TAX (Net Income) of the components of financial Statement

The net income is evaluated after subtracting the tax and the amount of interest from the EBIT amount. The net income amount is mentioned in the balance sheet as retained earnings. The retained amount is evaluated after subtracting the number of dividends from the net income amount.

Balance Sheet of the components of financial Statement

Statement of financial position is one of the most important financial statement for an organization. It is also known as balance sheet (BS) which represents information about the financial condition and position of a company about assets, liabilities, and owners’ equity on a specified date. Through balance sheet, the organization’s strengths & weaknesses can be understood. The following are the key components of the balance sheet, which are explained in detail:

Non-Current Assets and Current Assets (Assets) of the components of financial Statement

Statement of financial position includes the assets which the organization possesses. There are two types of assets that the organization possesses. These assets include current assets & fixed assets. The current assets of the organization include cash & cash equivalent, inventory, account receivable and prepaid insurance, etc. The fixed assets of the organization usually include property, equipment, and plant (Griffin, 2012).

Non-Current Liabilities & Current Liabilities (Liabilities) of the components of financial Statement

The liabilities include the amounts which the organization has to pay to its creditors. There are two types of liabilities that are encompassed in the balance sheet. These liabilities are current liabilities and long term liabilities. For the short term the current liabilities is for the short period, and the long term liabilities is for the long term periods

Capital/Equity of the components of financial Statement

The equity section of the organization provides brief information about the amount of equity. This section includes the amount of capital.

Statement of Cash Flow of the components of financial Statement

CF statement provides information about the total cash flow recorded by the company as inflow and outflow. Several parts of cash flow statement show information about cash flows concerning with financing activities, investing activities, and operating activities. Here some further detail is presented in the below sections regarding cash flows of a company during a fiscal year. (Jonathan, 2010).

Cash from investing activities of the components of financial Statement

The cash from investing activities usually includes information about the activities which are related to investing. The investing activities cause cash outflow from the corporation. The cash outflow occurs as a result of long term investment in building, land, and equipment. Although most of the investing activities result in cash outflow, cash inflow can also occur from selling off assets, securities, and businesses.

Cash from operating activities of the components of financial Statement

The cash flow from operating activities occurs from the operations of the organization. The cash flow from operations includes the operating profit and other expenses. The cash flow from operations is considered an important measure for evaluating the operations of the organization. The cash flow from operations must be cash inflows in the long-time period if the organization wants to sustain it in the long run (Weygandt, et al., 2009).

Cash from financing activities of the components of financial Statement

The cash flow from financing activities includes those activities which the organization performs for financing its assets. The organization requires finding financial assets. Therefore, the cash outflow occurs when the organization provides a dividend to its shareholders. The cash inflow occurs when the organization sells bonds and issue shares to the general public.

Limitations of Financial Statements of the components of financial Statement

The financial report of the organization provides brief data about the financial performance of the organization and how efficiently the organization is managing its operations. However, it is not true that the information which the financial statements provide is completely true. The financial statements can be misleading and have various limitations. Some of the key limitations of the financial statements are discussed as follows:

Based on the time period of the components of financial Statement

The financial statements provide financial information about a specific time period. If any individual focuses on the financial information of anyone period only, then this information can mislead the individual because, in any one-period financial information might not provide the true financial position of the organization. In order to get deep insights regarding the financial performance of the corporation, it is important to evaluate the financial statements from a period of 5 years (Campbell, et al., 2011).

Comparison across companies not possible of the components of financial Statement

Sometimes the comparison across the companies is not possible because different companies follow different accounting practices, which makes it difficult to compare the financial statements. Moreover, the cash flow statement of any organization does not evaluate efficiency. Therefore, comparing performance or efficiency of the organization becomes impossible through cash flow statement. The organization provides disclosures along with the financial statements, which can help the individual in comparing the financial statements or getting a deeper idea about the financial statements.

Intangible assets not recorded of the components of financial Statement

In financial reports, many intangible assets are not included. The amount which the organization spends on the creation of the intangible asset is included in the expenses. This has become a huge problem for the organization especially for those who spend huge amount on creating the value of the organization or creating a brand image in the mind of the customers.

Net profit not presented in Cash flow of the components of financial Statement

The cash flow statement has a major limitation that it does not provide information regarding the net profit of the organization. The cash flow statement cannot provide information about the net income because it ignores the non-cash items. The non-cash items are mentioned in the income statement or the statement of profit and loss. The cash flow cannot present profitability because it does not include items like revenue, direct, and indirect costs. It means that the organization will have to refer to the income statement to know about the profitability of the organization (Jonathan, 2010).

Dependent on historical expenses of the components of financial Statement

The Amounts which are encompassed in the balance sheet are recorded on cost. It means that items in the balance sheet might experience a change in prices, which can mislead the individual. Such a balance sheet which relies on historical cost may not provide accurate information to its users. There is various reason for the changes in prices such as inflation. The price of the assets increases due to the inflationary effect.

Objectives and analysis of Financial Statement of the components of financial Statement

Financial statement developed with financial details provides information to the stakeholders including shareholders of the company. The financial statement covers deep insight into the performance outcomes of the company. The objectives of financial statement development are not limited to delivery of information only in fact it covers the following objective also.

To provide information for decision making of the components of financial Statement

The financial statements provide a clear picture of the organization and where the organization is heading. The corporation uses the financial statement to know how much profit it has earned and what resources & capabilities the organization currently has. With financial statements, the organization’s management gets the idea about the profitability, liquidity, efficiency and financial leverage. With these insights the management takes different decisions. The top management of the organization needs financial statements to make rational financial decisions. When the organization has to invest in new project they evaluate their profitability to find out whether they have the resources to invest in new projects or not (Fridson & Alvarez, 2011).

To provide information regarding financial performance of the components of financial Statement

The financial statements provide information about the profitability, liquidity, financial leverage, and efficiency of the organization. If the financial statements are critically analyzed, then they can provide detail information regarding the performance of the company. It is important for the organization to know about the performance of the organization because if the organization is not going to evaluate its performance than there is chance that it might loss competitive edge over its competitors. With the help of financial statements the organization has the chance to gain competitive edge over its competitors. By reducing costs and increasing revenue the organization can get competitive edge on its competitors.

To know the policies of the management of the components of financial Statement

As discussed earlier financial statements not only provide information about organizational performance but also provide information regarding policies of the management. If the organizations' expenses are low and sales are high. Then it means that the organization is utilizing the efficiency of its assets for generating sales. If the organizations' assets are increasing, then it could be a sign that the organization is expanding its current operations. In simple words, it can be said that the organization's policies can be understood from various financial activities. The organization takes various decisions that reflect the financial statements. Therefore in order to know about different policies, financial statements can be analyzed (Fridson & Alvarez, 2011).

To know the effectiveness of business operations of the components of financial Statement

Financial statements can also be used for evaluating the operations of the business. Operating profit and expenses in the income statements provide a clear idea about how efficiently the business is handling its operations and what are the ways through which the operations of the business can be further improved. The business performs various activities on a daily basis, which can be known through the financial statements. The financial statements are not only used by the management for decision making but also used by the investors as well. The investors focus on the business operations to know how efficiently the business is working and whether investing in business will result in a profit or not (SINHA, 2012).

Users of the Statements of the components of financial Statement

Financial statements are not only utilized by the top management of the organization but also by the investors, customers, suppliers, and other stakeholders of the organizations as well. The management individuals, which include managers and CEO, use the financial statements to make different financial decisions. The managers utilize the statement to know how effectively the organization is utilizing its resources. The investors, on the other hand, use the financial statements to know the profitability of the organization. The investor wants to invest in such organizations which are generating significant amount of profit. The investors do not invest in such organizations which have lower profitability because the lower profitability means that the organization will provide a lower return on the investment.

The customers of the organization also evaluate the organization statements to know how they are providing benefits to society. The customers who want to invest in the company’s shares might also evaluate the financial statements. The suppliers and other business parts evaluate the financial statements because they are doing business with the organization and want to the financial position of the business. The shareholders might want to investigate the financial statements to identify the accuracy of the information (Fridson & Alvarez, 2011).

Conclusion of the components of financial Statement

The whole discussion concludes that organizations develop a financial statement for their stakeholders to provide them with the financial details of the company. The prime objective of the financial statement is to cater to details about financial performance outcome in the defined time duration. Some important examples of financial statements include a balance sheet, income statement, and statement of cash flow. Financial statements cover important information about organization and project efficiency of management in managing organizational operations. Somehow, financial details provided by these statements cannot be considered as entirely true information. Sometimes, these statements contain manipulated and misleading information on which investor and shareholders should not rely on decision making.

As discussed earlier, the financial statements are prepared so that the stakeholders of the organization can get deep insights regarding the financial performance of the organization. The financial statements are not only created for providing financial information. They have lots of other objectives as well. The financial statements provide information about the profitability, liquidity, financial leverage, and efficiency of the organization. If the financial statements are critically analyzed, then they can provide detail information regarding the performance of the company. Financial statements can also be used for evaluating the operations of the business.

It is concluded that the financial statements are among the most important financial documents which the organization prepares for providing financial information. The financial statement follows a complete format according to the standards which are set by the GAAP (Generally accepted accounting principles) and the IFRS (International Financial Reporting Standards). Although financial statements are important, they have their own limitations as well which should be kept in mind while taking various financial decisions in mind. If such limitations are not going to be kept in mind than the individual can suffer from financial loss. The financial statements are utilized by the management, customers, suppliers, third parties and any individual who have interest in the organization.

References of the components of financial Statement

Campbell, D., Edgar, D. & Stonehouse, G., 2011. Business Strategy: An Introduction. 3 ed. s.l.:Macmillan International Higher Education.

Cooper, K., Funnell, W. & Lee, J., 2012. Public Sector Accounting and Accountability in Australia. s.l.:UNSW Press.

Fridson, M. S. & Alvarez, F., 2011. Financial Statement Analysis: A Practitioner's Guide. s.l.:John Wiley & Sons.

Griffin, R. W., 2012. Management. s.l.:Cengage Learning.

Jonathan, B., 2010. Financial Management. s.l.:Pearson Education India.

SINHA, G., 2012. FINANCIAL STATEMENT ANALYSIS. s.l.:PHI Learning Pvt. Ltd.

Weygandt, J. J., Kimmel, P. D. & Kieso, D. E., 2009. Financial Accounting. 7 ed. s.l.:John Wiley & Sons.

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