Many students find it confusing that if we already have two financial statements, one covering the financial position of the business and the other telling about the financial performance then why do we need yet another statement with the name of Statement of Changes in Equity? And more interestingly, many think that its just a formality required by international and local standards and that’s why we write of statement of changes in equity.
Well, things are not that simple and also if something is not giving much of a valuable information then no one likes to waste resources in drawing up an additional statement.
Let’s first of all understand what other statements are providing? and then we will talk about what other financial statements are not telling us?
Statement of financial position provides information about the financial position of the business as it bears the important totals of assets, liabilities and the interest of owners in the business in the form of capital. By going through the status of business’ assets and burden of liabilities and the ability to pay them back on time, investors can learn much about the business.
Income statement on the other hand provides information about how business has performed in the particular time range and how business has utilized his strengths, assets and opportunities and how much income has generated against the expenses and liabilities incurred. Going through such figures users of financial information can have a great insight about the pace of business operation and its direction.
But owners have invested in the business to maximize their wealth and they are interested in knowing how the business’ financial position and financial performance has affected their vested interest in the business. And this is not particularly catered neither by Statement of Financial Position nor Income Statement.
Thus statement of financial position actually tells the users about the status of owner’s wealth i.e. equity at the beginning of the financial period and how it has changed during the year because of number of things and what is left at the end of the period. This statement sums up the effect of profit or loss earnt during the period, additional investment made or disinvestment, distribution of profit among the stakeholders or its retention in the business and the correction of prior period errors.
Therefore, through Statement of Changes in Equity users, especially owners of the business, can learn about the effects of business operations and related factors on the wealth of the owners vested in the business. And how such wealth was utilized during the period and the flows of such wealth.