CH # 2:
Introduction to
Financial Statements
and Other Financial
Reporting Topics
By,
Sumaira Aslam
Lecturer
The Islamia University Of Bahawalpur, Pakistan
Forms of Business Entities
Business:
Any legal activity to earn profit.
• Sole Proprietorship:
A business owned and controlled by one person, is not a legal
entity separate from its owner.
• Partnership:
A business owned by two or more individuals. Each owner, called
a partner, is personally responsible for debts of the partnership.
Partners and business are separate entities.
• Joint Stock Company/Business Corporation:
Business which is formed under company’s ordinance 1984 and
has legal right to act as a person. A legal entity incorporated in a
particular state. Ownership is evidenced by shares of stock.
The Financial Statements
1. Balance Sheet (Statement of Financial position)
Measures the financial position at any point in
time.
Three major sections:
I. Assets: Resources of the firm
II. Liabilities: The debts of the firm.
III. Owners’ Equity: Owners’ claims against the
assets of the business.
Continued………..
2. Income Statement (Statement of Earnings):
Summarizes revenues and expenses and gains
and losses (operating costs), ending with net
income (at the end of an accounting period)
3. Statement of Owners’ Equity (Reconciliation of
owners’ equity account):
Reconciliation of beginning and ending balances
of their owners’ equity account.
R/E links the balance sheet to income statement.
Continued…………..
4. Statement of Cash Flows:
Details the inflows and outflows of cash during a specified
period of time.
Three main Sections:
I. Cash flows from operation activities
II. Cash flows from investing activities
III.Cash flows from financing activities
5. Footnotes:
Footnotes to financial statements are used to present
additional information about items included in financial
statements and to present additional financial information.
The Accounting Cycle
Accounting Period: it is a time period in which the
business measures its operating results.
Accounting Cycle: The sequence of accounting
procedures completed during each accounting
period is the accounting cycle.
 Steps:
Recording transactions
Recording adjusting entries
Recording the financial statements
Continued…………
Transaction:
An event that causes a change in a company’s
assets, liabilities, or owners; equity, thus
changing the company’s financial position.
 A transaction recorded in a journal is referred to
as journal entry.
Working of steps:
• Recording to trial balances( T-Account)
• Adjusting to ledgers
• Presenting to statements
Human Resources And Social
Accounting
Human Resource Accounting:
Attempts to account for the services of
employees.
Social Accounting:
Attempts to account for benefits to social
environments within which the firm operates.
Reporting in development phase.
Disclosure is being started by many firms.
Auditor’s Report
An auditor’s report is the formal statement of the
auditor’s opinion of the financial statement after
conducting an audit.
Audit:
An auditor(Certified public accountant) conducts
an independent examination of the accounting
information presented by the business and
issues a report thereon.
He/she inspect the conformity of GAAP.
Classification of auditor’s opinion:
Unqualified opinion (Clean):
Financial statements presents fairly, in all material respects, the
financial position, results of operations, and cash flows of the
entity, in conformity with GAAP.
Qualified Opinion:
States that, except for the effects of the matter(s) to which the
qualification relates, the financial statements present fairly, in all
material respects the financial positions, results of operations,
and cash flows of the entity , in conformity with GAAP.
A Qualified Opinion report is issued when the auditor
encountered one of two types of situations which do not comply
with generally accepted accounting principles, however the rest
of the financial statements are fairly presented.
Continued…………..
Adverse Opinion:
It states that the financial statements do not present
fairly the financial position, results of the operations,
and cash flows of the entity, in confirmatory with
GAAP.
Disclaimer of Opinion:
It states that auditor does not express an opinion on the
financial statements.
A disclaimer of opinion is rendered when the auditor
has not performed an audit sufficient in scope to form
an opinion.
Auditing Standards
1. General Standards
2. Fieldwork Standards
3. Reporting Standards
Review Report:
Outside accountant associated with financial statements to
indicate that accountants are not aware of any material
modifications that should be made to FS in order for them
to be in confirmatory with GAAP or the report will indicate
departures from GAAP.
Accountant’s report indicates the deficiencies as:
•
•
•
Omission of substantially all disclosures
Omission of statement of cash flows
Accounting principles not generally accepted.
Other Reports
 Form 10-K:
The difference between an annual report and a 10-K report, is that
the annual is used to represent the state of the company to
shareholders. A 10-K is an official document that traded
companies must file with the Securities and Exchange
Commissions. Unlike the annual report, it is filed to fulfill a
regulatory requirement for transparency.
Due within 90 days of the end of fiscal year.
 Form 10-Q: Quarterly Reports
Due quarterly but not required for forth quarter.
 Form 8-K: Current Reports
Due after 8 days of event