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
In business, the financial statements definition refers to a group of reports used by a company to monitor its financial status. These statements provide financial details within a specified time period, which is usually one year, but this timeframe can vary.
What is the most important thing in a financial statement? ›
Types of Financial Statements: Income 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 main purpose of each of the financial statements? ›
"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions." Financial statements should be understandable, relevant, reliable and comparable.
Which of the 4 financial statements do you think is the most important and useful in predicting a company's success? ›
Many analysts believe that the statement of cash flows is particularly useful in predicting future cash flows that may be available for payment of debt to creditors and dividends to investors.
What is the importance of financial reporting? ›
Financial reporting is important because it gives confidence to the investors to invest in the company if the statements are sound. So, it helps in accurately raising funds from the public. The statutory auditors also audit the financial statements reported by the company.
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.
Which two of the three financial statements is most important? ›
Another way of looking at the question is which two statements provide the most information? In that case, the best selection is the income statement and balance sheet, since the statement of cash flows can be constructed from these two documents.
What is the most important part of the financial statement analysis? ›
Many investors consider the cash flow statement the most important indicator of a company's performance. Today, investors quickly flip to this section to see if the company is actually making money or not and what its funding requirements are.
What is the most important financial statement quizlet? ›
Statement of cash flows. A possible candidate for most important financial statement is the statement of cash flows, because it focuses solely on changes in cash inflows and outflows.
Why is financial performance important? ›
Financial performance is an important metric to various stakeholders in the business. For investors and shareholders, it provides an indicator of how well the business will be able to generate a return on their investment. For lenders, it lets them know how well the business will be able to repay its loans.
A special- purpose financial statement is a financial report that is intended for presentation to specific users, and it may accompany a complete set of financial statements that is intended for general use, or it may be presented separately. The audits of such statements are conducted in accordance with all the SAs.
What are the advantages of financial statements? ›
Financial statements help assess a company's financial health by providing a comprehensive view of its financial position, profitability, cash flows, and equity. Analysis of these statements enables evaluation of performance, liquidity, solvency, and efficiency indicators to gauge overall financial well-being.
What are the main financial statements and their importance? ›
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. Not all financial statements are created equally.
What is the most important part of the financial statements? ›
The income statement will be the most important if you want to evaluate a business's performance or ascertain your tax liability. The income statement (Profit and loss account) measures and reports how much profit a business has generated over time. It is, therefore, an essential financial statement for many users.
Why are financial statements important to financial institutions? ›
Financial statements play a crucial role in assessing the financial health and performance of a company. They provide valuable information to stakeholders such as investors, lenders, and managers, helping them make informed decisions about investment opportunities, creditworthiness, and strategic planning.
What do the financial statements represent? ›
Financial Statement
These statements represent the financial performance of the entity and its current fiscal position as well. A financial statement is prepared by following certain logical and consistent accounting principles, assumptions and methodologies.
Why are financial statements important to employees? ›
Benefits of Financial Statements for Company Employees
The benefit of financial statements for employees of a company is to find out the company's ability to pay salaries. With the presence of stable financial reports, the employees of the company will certainly have more confidence.
What is financial management and its importance? ›
In business, financial management is the practice of handling a company's finances in a way that allows it to be successful and compliant with regulations. That takes both a high-level plan and boots-on-the-ground execution.
