Q.What do you mean by financial statements? State their nature (characteristics).

Financial statements are the summarised, periodic reports a business prepares at the end of an accounting period to show how it performed and where it stands financially.

They are drawn up from the ledger balances at the close of the period so that owners, lenders, management and the government can read and act on the firm's results.

Meaning. Financial statements are the summarised, periodic reports prepared at the end of an accounting period to answer two basic questions — how much did the business earn or lose during the period, and what does it own and owe at the end of it? They are the end-products of the whole accounting process: the day-to-day recording in journals and ledgers is finally classified and summarised into a small set of reports. For a typical business the set comprises the Statement of Profit and Loss, the Balance Sheet and the Cash Flow Statement, together with the notes and schedules that explain the figures.

Nature (characteristics) of financial statements:

1. End-product of the accounting process — they are prepared by classifying and summarising the balances already recorded in the ledger, so their reliability depends on the accuracy of the books.
2. Historical in character — they report what has already happened during a past period; they are not forecasts of the future.
3. Based on recorded facts, conventions and judgement together — the figures come partly from recorded transactions, partly from accepted conventions (going concern, money measurement, cost), and partly from the accountant's estimates (depreciation, provisions).
4. Expressed in monetary terms — only items measurable in money appear; valuable non-monetary factors such as workforce skill or customer loyalty do not.
5. Prepared periodically — for a defined accounting period, so that performance and position can be compared over time.

Students often list only 'profit and loss account and balance sheet' and forget that the cash flow statement (and the notes/schedules) are part of the set. On 'nature', a frequent slip is to state only that they are historical while omitting that they rest on a mixture of recorded facts, conventions and judgement — this combination is the point that distinguishes their character. Do not confuse 'nature' (characteristics) with 'objectives' (purposes) — the question here asks for characteristics.