Concept  of Financial statements 

Financial statements portray the financial effect of transactions and events by grouping them into classes broadly called elements. A complete set of financial statements normally consists of a Balance Sheet, a profit and loss Account and a Statement of Cash Flows, notes and related statements.

Balance sheet is known as position statement because it is prepared to know the financial position at the end of the period. Assets are shown on the assets side and capital and liabilities are shown on the liabilities side of the balance sheet.

Financial statements can be prepared in vertical form or in horizontal form. Generally, all non-corporate entities present their financial statements in horizontal form. Nowadays, all corporate entities are presenting their statements in vertical form.

The purpose of the income statement is to determine the profits of the company. This statement is also helpful in predicting the future profitability of the concern and the future cash generating ability of the enterprise.

A cash flow statement reports the change in ‘cash and cash equivalents' by classifying the inflows and outflows into three categories. They are: Cash flows from operating activities; Cash flows from investing activities and Cash flows from financing activities.

The assumptions and conventions used in the preparation of financial statements give rise to several limitations.

These assumptions also manifest themselves in the form of measurement errors or accounting frauds.

The major sources of measurement error introduced by GAAP accounting rules relate to the recognition and valuation of non-financial assets.

Measurement errors due to lack of foresight occur because even if the management has done a thorough job at estimating inherently subjective future amounts, there is still a little probability that it might involve a potential estimation error.