Preparing the financial statements of a company holds huge importance for both the management as well as potential investors. Without the financial statements, it would not be possible to even imagine the present or future of a company. there are also various uses for the financial statements of a business.
Let us first understand what does one mean by Financial Statement
What is the Financial Statement?
The Financial Statements of a company are usually all the written records of the business activities which have been performed. These mostly consist of
- Balance Sheet
- Cash Flow Statement
- Profit and Loss Statement ( Income Statement)
These statements are generally prepared by an accountant for a set period of time. The analysis of the information prepared helps the management of the company to understand the financial health of the company. A deeper analysis accompanied by an Audit of the company will also assist the management in making decisions for the future.
Let’s now understand the importance of these financial statements
Importance of Financial Statements
The Financial statements provide financial information of the company not only to the management but also to the shareholders, investors, as well as the potential investors who are thinking of investing in the company.
Some of the importance of Financial Statements are:
1.Importance to the Management
After the analysis of these Financial Statements, the management can obtain correct and exact data, which will help them to understand the present financial condition of the company. this way, the management will not only understand what changes have to be made in the present but can also devise a future pathway for the company.
By knowing the accurate realities, the management will be able to formulate policies and strategies which will assist the growth of the company in the future. The management will also understand what are the present trends in the market and make suitable changes in the business activities accordingly.
2.Importance to Public
A business can affect the public in a lot of ways. There are various analysts, trade associations, research scholars, etc. which can analyze the financial statements and then comment or make any judgment on the company.
The financial statements will also assist the potential investors to understand the workings of the company and will also help to decide if it will be in the interest of the investor to invest in the company.
3.Importance to Shareholders
One of the major objectives of a business is to provide a monetary benefit to the shareholders and investors. Though the investors and shareholders cannot take part in the day to day activities of the company, after the analysis of the financial statements, they can decide that the decision to invest in the company was a good one or not.
4.Importance to the Economy
The growth of the companies directly or indirectly affect the growth of the economy of a country. the financial statements help the management to comply with all the rules and regulations that have been specified by the government. The financial statements also help the public to be aware of the tactics of a company and avoid getting cheated.
The preparation of the financial statements also helps increase the confidence of the public and increase their chances of investment in a company. By preparing the financial statements, an investor will get to know if the business is compliant with all the important rules and regulations of the country and is there any chances of the company to be liquidated in the future.
These are some of the reasons due to which the preparation of the financial statements holds special importance for not only the management but also for the public as well as the economy of the country. Thus extra care should be taken while preparing the financial records of a company.
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