Financial statements deliver an abstract of the accounts of an organization, the balance sheet representing assets and liabilities, and the income statement demonstrating the outcomes of operational activities in the specified period. These statements function as a primary source of information as they deliver organized and simple-to-comprehend information concerning the business operations of an organization.

The purpose of financial statements is to distribute information like performance details, financial standings, and modifications to the financial position of the company.  It facilitates the use of the financial statement to reach a conclusion. The financial statements outline the assets, liabilities, equity, income, and expenses throughout a specific accounting phase.

What are Financial Statements?

 Financial statements serve as a means of communication between the company and various stakeholders, providing information about the financial standing and earning capacity of the business at the end of the financial year. The company’s financial statements provide valuable assistance for a variety of analyses.

To make certain of the accountability and correctness of the financial statements, companies, accounting professionals, regulatory bodies, etc., review the statements.

Objectives of Financial Statements

Following are some of the objectives of the financial statements:

  • The financial statement is prepared to accurately and impartially portray the company’s financial results.
  • The company prepares the financial statement to accurately and impartially portray its financial status.
  • Delivering in-depth information for various users of the financial statements concerning the resources of the firm.
  • Prepping the financial statements to assist the management as well as the owners of the company in the decision-making framework.
Applications for Financial Reports

The subsequent are numerous uses of financial statements:

Assess the company’s financial situation: Financial statements are to deliver the information for the financial position of the company at the specified date. This bit of information is employed by numerous stakeholders in order to take the vital decisions for the business.

To acquire credit: Financial statements reveal the picture of the business to the possible lenders, and this information can be utilized by them to offer further credit for business scaling or limit the credit so as to initiate recovery.

Assists investors in making decisions: Financial statements are comprised of all the vital information essential for the potential investors for evaluating the extent of the investment in the business. It is also useful in the preparation of the decision concerning the price per stock that the investors desire to invest. A credible financial statement is crucial for attracting investments.

Aids in the formulation of policy: The financial statements support the government in choosing the taxation and regulations policies in accordance with the manner the company is managing its operations. The regulatory bodies can impose taxes on a business as per the level of their income and assets.

Beneficial to stock traders: The financial statements provide stock traders with accurate information about the company, enabling them to adjust their quotations based on the actual situation.

Importance of Financial Statement

The value of financial statements lies in their ability to persuade various groups such as creditors, the public, and management.

For Management: –

  1. The growth in size and complexity of factors affecting business operations necessitates a scientific and strategic approach to management.
  2. The management team requires accurate, current, and methodical financial data to make informed decisions.
  3. Financial statements are crucial for providing the management with insights into the business’s performance and prospects.
  4. Financial statements help management assess the business’s progress and potential.
  5. Financial statements assist in understanding the company’s standing within the industry and its competitive position.

For Shareholders: –

  1. In companies, management is separate from ownership and control, meaning shareholders are not involved in day-to-day operations.
  2. Although shareholders cannot participate in daily activities, they should be informed about the outcomes of these activities.
  3. Financial statements serve as a tool to disclose the results of business activities to shareholders.
  4. The financial performance and status of the company are shared with shareholders during the annual general body meeting.
Questions to Understand your ability

Q1.) What’s the main purpose of financial statements?

a) To get the company some tax breaks

b) To show how well the business is doing financially

c) To boost the company’s sales

d) To land new business deals

Q2.) Which of these is NOT an objective of financial statements?

a) To accurately reflect the company’s financial performance

b) To help management and owners make decisions

c) To provide details on the firm’s resources

d) To bring in more customers and sales

Q3.) How do financial statements help investors?

a) They predict the future value of stocks

b) They give all the info needed to decide on investments

c) They promise tax savings

d) They list upcoming sales goals

Q4.) Why are financial statements so important for management?

a) To see how much employees earn

b) To help make smart business decisions

c) To reduce taxes

d) To plan marketing and sales strategies

Q5.) How do financial statements help shareholders?

a) By listing daily tasks and operations

b) By giving them discounts for investing more

c) By keeping them updated on business results at annual meetings

d) By showing who owns the company

Conclusion

Financial statements can provide transparency and insights into the firm’s financial wellness, performance, and position. Financial statements serve numerous purposes, including informing management, shareholders, investors, and regulators. By delivering accurate, neutral data, financial statements encourage strategic decision-making and investment analysis. Ultimately, they play a crucial role in certifying accountability, fostering trust, and fostering growth within the business landscape.

FAQ's

Financial statements are the company’s report card. They tell you where the business stands financially and how much it’s earning at the end of the year.

Because they give everyone the lowdown on the company’s financial health—without them, no one can make smart decisions about the business.

They’re here to show the company’s financial results, explain its resources, and help the people in charge make tough calls about the business.

They break down the company’s financial situation at a certain point, helping everyone from managers to investors figure out where the business stands.

Lenders look at the financial statements to decide if the company’s worth lending money to—if the numbers are bad, they might pull back or help the business recover.

They give investors the key data needed to decide if they should invest and how much. A solid financial statement tells them if the business is worth the risk.

Governments use them to figure out how to tax the business, set regulations, and decide how much they should get from the company based on its earnings.

Shareholders don’t run the day-to-day, but financial statements give them the full picture of how the business is doing—so they know if their investment is solid or shaky.