Preparing the financial statements of a company holds massive importance for both the Management as well as potential investors. Without the financial statements, it would not be possible to know about the present state of the business. Not only this, when the financial statements are analysed, they provide an insight into the future trends in the business environment. This is the reason why many jurisdictions have made it mandatory to prepare and maintain the financial statements of the company. There are also various uses for the financial statements of a business.
Let us first understand what one means by Financial Statement.
What is a Financial Statement?
The Financial Statements of a company are usually all the written records of the business activities performed. These statements or reports comprise all the transactions made by the business in both cash and kind, the income and expenditures made for continuing the business activities and a list of all the assets and liabilities of the company.
The Financial Statements mainly consist of the following:
- Balance Sheet
- Cash Flow Statement
- Profit and Loss Statement (Income Statement)
An accountant generally prepares these statements for a set period of time (usually a business quarter or the entire financial year). 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.
Below the importance of the financial statements are mentioned. The list mentioned below is not a comprehensive list as many other functions can be added to this list.
Importance of Financial Statements
The Financial statements provide all necessary information about the finances of the company to the Management, shareholders, investors of the company so that they all can make an informed decision.
Some of the importance of Financial Statements are:
- Importance to the Management
After the analysis of the Financial Statements, the management will be in a better position to 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 current but can also devise a future pathway for the company.
By knowing about the objective realities, the Management will be able to formulate policies and strategies that will assist the company's growth in the future. Management will also understand what are the present trends in the market and make suitable changes in the business activities accordingly, which will assist in the growth and development of the business.
- 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 analyse the financial statements and then comment or make any judgment on the company. The common people follow the advice of such people and then make investments. In a way, the financial statements of a company help the public to enhance their wealth by providing all the necessary information according to which they can make the investment decisions.
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.
- Importance to Shareholders
One of the primary objectives of a business is to provide a monetary benefit to the shareholders and investors in the long run. 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 choice to invest in the company was a good one or not. The Financial Statements will allow these shareholders and investors to determine how much investment should be made in the company or should opt-out of the company.
- Importance to the Economy
The growth of the companies directly or indirectly affect the development 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 allow the public to be aware of the tactics of a company and avoid getting cheated.
The preparation of the financial statements also helps to increase the confidence of the public, which in turn increases their chances of investment in the company. By preparing the financial statements, an investor will get to know if the business is compliant with all the essential rules and regulations of the country and is there any chances of the company being liquidated in the future.
These are some of the reasons due to which the preparation of the financial statements holds particular importance for not only the Management but also for the public as well as the Economy of the country. This is why it is recommended that the management should take extra care during the preparation of the financial statements of the company.
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