Financial Statements: Uses, Importance, Meaning (2024)

FAQs

Financial Statements: Uses, Importance, Meaning? ›

Business stakeholders and shareholders use these statements to make meaningful and strategic business decisions. Helps investors in decision making: These financial statements contain every information an investor requires in making investing decisions.

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.

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.

Investors use financial statement analysis to assess a company's profitability, growth potential, and financial stability. This analysis enables investors to identify companies that are likely to generate good returns on investment and avoid companies that are risky.

It is an important indicator of the company's financial status because it is used to cover short term obligations of the company's operations. If the company suffers from a decline in its current assets then that means it needs to find new means to finance its activities.

It allows you to manage your business cash flow efficiently and obtain the best prices from suppliers and the best interest rates from your lenders. The first items your lenders will ask for are updated financial statements and recent tax returns.

Financial reporting is a crucial process for companies and investors, as it provides key information that shows financial performance over time. Government and private regulatory institutions also monitor financial reporting to ensure fair trade, compensation and financial activities.

The income statement provides deep insight into the core operating activities that generate earnings for the firm. The balance sheet and cash flow statement, however, focus more on the capital management of the firm in terms of both assets and structure.

What makes a financial statement useful? FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.

What are the main objectives of financial statements? ›

The main objective of preparing the financial statement is to present a true and fair view of the financial performance and position. Accounting data is summarised in such a way that the profitability of the business is clearly visible. It also serves as an information tool for all the parties concerned with the firm.

There are five main elements of financial statements that are typically measured: assets, liabilities, equity, income, and expenses.

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.

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.

The financial performance identifies how well a company generates revenues and manages its assets, liabilities, and the financial interests of its stakeholders and stockholders. There are many ways to measure financial performance, but all measures should be taken in aggregate.

GPFS are financial statements that are prepared for external users, such as shareholders, lenders, regulators, and investors. They are more comprehensive and detailed than SPFS and are intended to provide a full picture of a company's financial position, performance, and cash flows.

Financial statements prepared under a special purpose framework or special circ*mstance are unique engagements that provide specific and relevant information to a specific group of users. Therefore, due consideration should be given by the management and the auditor to the requirements of such specific users.

These four financial statements are vital for companies to understand where cash comes in and where it goes out, prepare for taxation and analyze their financial position.