CBSE Class 11 » CBSE Class 11 Study Materials » Accountancy » Inquiry of Financial Statements

Inquiry of Financial Statements

A Financial Statement is the complete annual data of any entity on the expenditure, breakdown of income, either increasing or decreasing assets, and itemised balanced sheet.

A financial statement enquiry is the annual report of any organisation or entity. This statement shall be used by stakeholders, investors, board of directors, lenders, employees, customers, and others related to the entity. The main goal of making this statement is to present to the management, shareholders or even government. Most of this data is collected from the Tax Administration’s business file. The Statistics Act (280/2004) mentions this obligation of providing data. The data can easily be submitted on the web form online by the enterprise. The inquiry data shall be from 1 January of the previous year to December 31st of the same year. The enterprise shall submit them in March as the financial statement data collection shall start in March. The collected data shall be useful in determining the statistical reports that describe any enterprises’ business statistics, economic statistics and foreign ownership.

Elements of Financial Statements

There are five key elements of a Financial Statement. Out of these five, three elements are the main for a balance sheet, i.e. Liabilities, Assets, and Equities. The other two elements, i.e. revenues and expenses, are important parts of the income statement. 

Assets

In accounting, an asset shall be an economically important resource owned by any organisation or entity that in future can be useful in producing positive economic value. Thus, we can say that assets represent the value of the ownership that can be converted into cash if needed. Assets cover the money and other valuable belongings of any man.

Assets = Liabilities + Owner’s Equity

Examples of Assets

  • Cash and cash equivalents.
  • Vehicles.
  • Furniture.
  • Accounts Receivable.
  • Computer equipment
  • Inventory.
  • Patents 
  • Investments.
  • PPE (Property, Plant, and Equipment) 

Assets can be of two types: tangible and intangible assets.

The tangible assets are the physical assets that will include cash, equipment, inventory, vehicles, buildings and investments. On the other hand, Intangible assets are not physical such as prepaid expenses, accounts receivable, and patents and goodwill.

Liabilities

Liability is the future sacrifice for any economic benefit that any entity is obliged to pay to any other entity due to any past event (or any past transactions). The settlements of liabilities shall include the transfer of assets or any other economic benefit to the other entity in the future.

Examples of Liabilities

  • Bank Loan
  • Overdraft
  • Interest payable
  • Salary payable
  • Tax payable
  • Borrowing from parent company
  • Intercompany account payable

Liabilities represented on a balance sheet are of usually two types, i.e. current liabilities and long-term liabilities. The current liabilities are needed to be liquidated within a year, whereas the long-term liabilities are not bound to be liquidated within a year. Examples of current liabilities include; wages, taxes, accounts payable etc. Examples of long-term liabilities are notes, payables, long-term leases, pension obligations etc.

Equity 

The equity of any company or entity is the value that must be returned to the company’s shareholders after liquidating all the assets and paying all the entity’s debts. We can calculate equity by subtracting the liabilities from the assets of the given entity.

Equities = Assets – Liabilities

If there is an increase in assets and liabilities remaining constant, equities will increase. On the other hand, if liabilities increase and assets remain the same, the equity shall decrease.

Examples of Equity

  • Common stock 
  • Treasury stock
  • Dividends 
  • Preferred stock
  • Additional paid-in capital
  • Contributed surplus
  • Other comprehensive income (OCI)

Revenues

Revenue is the total income that any entity generates by selling their goods or services, or simply we can say it as the sales or turnover of the company. Some of the companies or investors may receive the revenue from the royalties or interest of the company. To calculate a company’s profit, we should subtract the total revenue and the total expenses for a given period. The revenues of any company to be included in the income statement are based on two accounting principles, i.e. cash basis and accrual basis. Cash basis is recognised at the time of collection of cash. Whereas accrual basis is recognised when transferring risk and rewards from sellers to buyers. 

Types of Revenues

  • Sales revenue
  • Rent revenue
  • Dividend revenue
  • Interest revenue
  • Contra revenue

Expenses 

The expense of any company simply refers to the amount of money spent and costs incurred in pursuing any revenue. In other words, we can say that expenses are the costs or money required for running a business.

Examples of expenses

  • Cost of goods sold
  • Rental Expenses
  • Repair and maintenance
  • Internet Fee
  • Telephone fee
  • Salaries expenses
  • Depreciation
  • Utility expenses
  • Transportation Cost
  • Marketing Expenses

Conclusion 

A financial statement enquiry is an annual report presented by the organisation for the previous year. The information in these reports shall be useful for stakeholders, investors, board of directors, lenders, employees, customers, and others related to the entity. The collected data shall be useful in determining the statistical reports that describe any enterprises’ business statistics, economic statistics and foreign ownership. There are five key elements of a Financial Statement. Out of these, three elements are the main for a balance sheet, i.e. Liabilities, Assets, and Equities. The other two elements, i.e. revenues and expenses, are important parts of the income statement.

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Frequently Asked Questions

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How do we review a financial statement?

Answer. The financial statement review includes six basic steps: ...Read full

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Answer. The labour unions need these company’s financial statements to analyse and evaluate the capacity of the entity to compensate and bene...Read full

What are the five fundamentals of Inquiry of Financial Statement?

Answer. The five fundamentals or keys of Inquiry of Financial Statements are liabilities, assets, equities, expenses and revenues. Out of these fiv...Read full

Why are financial statements important?

Answer. The financial statements of any company holds a very important place as they provide reliable, true and unbi...Read full