Financial Statements Meaning
Financial statements are the statements that present an actual view of the financial performance of an organization at the end of a financial year. It represents a formal record of financial transactions taking place in an organization. These statements help the users of the information in determining the financial position, liquidity and performance of the organization.
Uses of Financial Statements
Following are some of the uses of financial statements:
- Determine the financial position of the business: The most important use of the financial statements is to provide information about the financial position of the business on a given date. This piece of information is used by various stakeholders in order to take important decisions regarding the business.
- To obtain credit: Financial statements present the picture of the business to the potential lenders and this information can be used by them to provide additional credit for business expansion or restrict the credit so as to start recovery.
- Helps investors in decision making: Financial statements contain all the essential information required by the potential investors for determining how much they want to invest in the business. It is also helpful in decision making regarding the price per share that the investors want to invest. A sound financial statement is the key to obtaining investments.
- Helps in policy making: The financial statements help the government in deciding the taxation and regulations policies based on the way the company is running its operations. The government bodies can tax a business based on the level of their income and assets.
- Useful for stock traders: Financials statements help stock traders with the knowledge of the situation the company is in and therefore adjusting their quotes accordingly.
Also Read:Financial Statements of a Company
Importance of Financial Statement
The significance of financial statements prevails in their service to persuade the diverse interests of distinct classes of parties such as creditors, public, management, etc.,
- Importance to Management: Increase in size and intricacies of aspects influencing the business functions requires scientific and strategic access in the management of contemporary trading concerns.The management team needs up to date, precise and methodical financial data for the intentions. Financial statements assist the management in comprehending the progress, prospects, and position of the business counterpart in the industry.
- Importance to the Shareholders: Management is detached from control in the case of companies. Shareholders cannot take part in the day-to-day business pursuits. However, the outcome of these pursuits should be disclosed to shareholders during the annual general body meeting in the form of financial statements.
Additional Reading:Types of Financial Statements
This concludes the article on the topic of Uses and Importance of Financial Statements, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S.
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FAQs
Financial statements are important to investors because they can provide information about a company's revenue, expenses, profitability, debt load, and ability to meet its short-term and long-term financial obligations.
What is the meaning of financial statement and its importance? ›
Financial statements serve as a means of communication with stakeholders such as investors, lenders, shareholders, and regulatory bodies. They provide a comprehensive view of the enterprise's financial position and performance, instilling confidence and trust among stakeholders.
What is the purpose of financial statements who uses them? ›
The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.
Why are the three financial statements important? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
Why is the statement of financial position important? ›
It shows the economic position of a company on the date of the statement. So, it is an essential tool for understanding the financial health of your business, making financially sound decisions to sustain and grow your company, and securing capital from investors and lenders.
What are 5 elements of financial statements? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
How do financial statements help in decision making? ›
As financial statements are regularly generated by a business and a strict format is followed, it makes it easy for investors to compare and contrast thereby allowing for easy decision-making. Investors do not want to undertake big risks as they risk losing everything they invest in your business.
What is the most important financial statement? ›
Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.
What is the understanding of financial statements? ›
Financial statements are written records that illustrates the business activities and the financial performance of a company. In most cases they are audited to ensure accuracy for tax, financing, or investing purposes.
How are financial statements connected? ›
Net income from the bottom of the income statement links to the balance sheet and cash flow statement. On the balance sheet, it feeds into retained earnings and on the cash flow statement, it is the starting point for the cash from operations section.
Financial statements are a group of significant reports that summarise an organisation's financial performance, financial condition, and cash flows. The main objective of financial statements is to provide information about the economic resources and obligations of a business.
What is the most important thing on a balance sheet? ›
Many experts believe that the most important areas on a balance sheet are cash, accounts receivable, short-term investments, property, plant, equipment, and other major liabilities.
What is an example of a financial statement? ›
The first of our financial statements examples is the cash flow statement. The cash flow statement shows the changes in a company's cash position during a fiscal period. The cash flow statement uses the net income figure from the income statement and adjusts it for non-cash expenses.
What is the most important of the financial statements? ›
Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.
What is financial statement in your own understanding? ›
A financial statement is a report that shows the financial activities and performance of a business. It is used by lenders and investors to check a business's financial health and earnings potential.
