Nature of Financial Statements

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Financial statements summarize recorded transactions in monetary terms. All cash flows, including day-to-day activities, are recorded in order of occurrence.

Here are some key points about the nature of financial statements:

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Recorded facts

Financial statements are based on information derived from accounting records, known as "recorded facts." These facts are maintained based on their original costs, not current market prices.

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Accounting conventions

Certain foundational accounting principles, like the Prudence Convention and the Materiality Convention, are followed when preparing financial statements.

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Personal judgment

Despite accounting conventions, the accountant's personal judgments heavily influence the nature of financial statements. These judgments determine how transactions and cash flows are recorded. For example, different methods can be used to value stocks, such as the standard cost method or the average cost method.