Question

Explain fully what the following financial documents are – what is their purpose and what does it track?

• Balance Sheet
• Budget
• Profit & Loss Statement
• Statement of Cash Flow

Answer 1

Balance Sheet :

Balance sheet can be described as a statement that reflects upon the financial position of the company at a particular period of time in a year , normally when the final accounts of business organisation are prepared.

Purpose :
This is a statement which provides all the information about the assets held by the company and amount of liabilities due on the company. The main motive of preparing the statement is to show the solvency of the company i.e whether the assets of the business organisation are enough to pay all of its debts with the available assets or not.

Tracking :
Balance sheet is expressed as a summary of the accounting record of business which tracks the current financial position of company and is used for comparison purposes to see whether the business has improved over a period of time.
It has two sides , one representing the assets side while the other representing the liabilities, both needs to balanced at the end which means that the business is running effective.It moreover provides a large amount of vital or essential information to the top management which is used for taking better decisions at right time.
It is considered as a mirror of business as it clearly shows , the acquisitions of business and what it has achieved over a period of time. It also helps the business to clear where the funds were used.

Budget :
Budget is an estimation, a projection or simply an ascertained of the cost that might be spend on the accomplishment of a project or a task.

Purpose :
Budget tends to provide a vision about how much finance will be required for a project so that the business keeps it readily available to prevent shortages.
This budgeting is a technique which helps the business to carry out its activities smoothly.

Tracking :
Budget helps the organisation to identify the various problems which might come in way of accomplishing goals.
It also improves the decision making of managers and decreases the chances of failure of project.

It acts as a valuable method to control costs involved in projects, and helps it to build a "plan for spending" , which in turn reduces waste or extravagant costs.
It is used as an essential tool to manage the funds, evaluate the policies and goals , and acts as a guideline for the entire organization.

It directs the financial resources of organisation to the most valuable channels and prifitable areas. Thus solves maximum oroblems relating to funds in a business.

It emphasis the finanacial stability and prevents wasteful activities

Profit And Loss:
This is defined as the statement which provides all the information about the profitability of business. It gives the result in the firm of profit or loss of the business.
Profit and loss however involves all the indirect costs incuured during production. Indirect cost refers to the cost which is not directly associated or related to production.

Purpose:
The statement serves as a major source of reflecting the profit to sales ratio i.e the intensity with which the organisation is generating profits from its routine sales, the efficiency of its operations, and helps in controlling the indirect expenses through analysing and compressing the unusual and unproductive activities that do not support production.

Cash flow Statement:
It is a financial statement which provides all the information relating to the inflow and outflow of funds in the firm of cash. Thus helps to track the cash inflows and cash outflows.

Purpose :
The statement helps to find out all the sources where huge amount of cash is spent and all those major areas where from cash is generated. Thus aims to increase the efficiency of sources where from funds are generated and the sources where the cash is invested to maximize profitability.
The internal as well as external sources where from cash is generated or spent are identified to plan in advance about these sources to be prepared.
It acts as a potrait that shows the activities resulting in weak liquidity position and reflects the weaknesses to overcome them.

Tracking:
Three important areas are tracked to know about tge cash inflow and outflow :
1) the operations
2) the investment
3) the financing

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