Chapter 1, Problem 1.1Q

To determine

To list: The items included in the definition of financial information and determine whether it is synonymous with the term financial statements.

Explanation of Solution

Solution:

Financial statements:

Financial statement is a complete record of the financial transactions that takes place in a company at a particular point of time. It provides important financial information like assets, liabilities, revenues, and expenses of the company to its internal and external users. It helps them to know the exact financial position of the company. There are four basic financial statements, they are:

• Income statement: This is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time. Income statement is also known as operations statement, earnings statement, revenue statement, or profit and loss statement. The net income is the excess of revenue over expenses.
• Retained earnings statement: This is a financial statement that shows the amount of the net income retained by a company at a particular point of time for reinvestment and to pay its debts and obligations. It shows the amount of retained earnings that is not paid as dividends to the shareholders.
• Balance sheet: This is a financial statement that shows the available assets (owner’s equity and outsider’s equity) and owed liabilities from investing and financial activities of a company. This statement reveals the financial health of company. So, this statement is also called as Statement of Financial Position. It helps the users to know the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities. The main components of balance sheet are assets, liabilities, and stockholders’ equity.
• Statement of cash flows: This is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It determines the net changes in cash through reporting the sources and uses of cash due to operating, investing, and financial activities of a company.

All firms prepare financial statements and footnotes to the statements based on the accounting standards. This holds records of all the financial activities of the business.

The items included in the financial information are as follows.

• Statement of shareholders’ equity
• A letter to the shareholders
• Management’s analysis of the firm
• Balance sheet
• Management report
• Auditor’s report
• Statement of comprehensive income
• Financial summary
• Statement of cash flows

No, the concept of financial information is not synonymous with the term financial statements. Financial information refers to information which tells more than just what financial statements do.

Financial statements include the cash flow statement, income statement, retained earnings statement, balance sheet, statement of shareholders’ equity, and footnotes.

On the other hand, financial information includes items more than the above mentioned statements. This includes a letter to the shareholders, management’s analysis of the firm, management’s report, auditor’s report, and financial summary.

Hence, it can be concluded that the financial statements are only a part of financial information.

Conclusion

Hence, the items included in the definition of financial information are listed as above. It can also be concluded that financial information is not synonymous with the term financial statements.