Impact of Finance on Financial Statements
Each type of financial statement provides financial information catered to different stakeholders. Furthermore, the different type of financial statements focuses on finances at other aspects of a business and its activities. It is important to remember that all financial statements must be considered for any financial decisions as they complement each other; each provides data that the other does not.
Financial statements are created because of the finances of a business. However, in this section, we refer to different sources of finance and their impact on financial statements. We will look at how these finances are mentioned in each financial statement. 
Profit and Loss Account
In the profit and loss account, the narration for finance is straightforward. It simply narrates finance income, refers to all the finance intake of the company from different sources, and then right below it narrates finance costs, referring to the expenses taken in finance. The profit and loss account provides an overall general numerical figure of all finance incomes and costs rather than providing details as to each source of finance.
Below are vital points in a profit and loss account.
- Provides the bottom-line result that refers to the health and performance of the business. These reflect the overall business and indicate key performance factors that allow improvement.
- Highlights and trends can be established by analyzing the profit and loss account.
- Establishing highlights and trends can be a basis for forecasting.
- The profit and Loss account summarizes the business’s financial performance and does not provide the whole picture.
- The income and loss statement is that it uses an accrual accounting method. The company considers revenue and expenditure as soon as they occur rather than the physical exchange of funds.
Balance Sheet
The balance sheet provides more detail concerning financing and its impact on financial statements. For example, under assets in the Emirate’s balance sheet, it includes narration and a numerical figure of loans and other receivables, and then right across it allows for the same for borrowing and lease liabilities. Therefore, this example clearly shows that the balance sheet details the finance under non-current or current assets. Still, the cost of the finance is immediately measured across under liabilities. Other finances, such as retained earnings, are also mentioned under equity.
Here are the critical points of the balance sheet.
- Calculating financial ratios via this can provide a general idea of a business’s financial position.
- Provides a company’s risk profile and the prospect of a return
- Data in a balance sheet provides details on how healthy a business is in the current period.
- Figures can be misleading as it is a statement calculated at any point in time.
- Some balance sheet figures can be less informative without some other company to compare against
- Items on the balance sheet are based on their original costs and, therefore, do not represent their current value, such as fixed assets.
Cash Flow Statement
The cash flow statement provides detailed information concerning financing; however, it is essential to remember that it is for any given time, usually at the current period. Therefore, if you analyze the operating activities of the Emirates cash flow statement – you can see that finances and their costs are mentioned, such as ‘Gain/Loss on sale of property, plant, and equipment.’ The finances are segregated according to the type of activity they fall under. For example, the abovementioned is stated under operating activities; however, Income for investments would fall under the Investing Activities section.
Here are some vital points for a cash flow statement.
- Indicates the actual cash position of a business.
- It helps businesses create projections of cash inflow and outflow in the future.
- It only provides cash position information and cannot be used to judge business performance.
- If used in a forecast structure, it can be misleading. The further the forecast span, the more distorted the information
- It must limit use if the other financial statements are not provided.
Conclusion
The influence of finance on financial statements is a crucial aspect of financial reporting that shapes how stakeholders interpret a company’s financial status. Each financial statement serves a unique purpose, with the profit and loss account offering a concise overview of income and costs, the balance sheet providing specifics about financing, and the cash flow statement detailing cash movements.
In conclusion, finance’s impact on financial statements emphasizes the importance of considering all three statements together to gain a complete understanding of a company’s financial situation and make informed decisions.
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