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
Financial statements are important to investors because they can provide information about a company's revenue, expenses, profitability, debt load, and ability to meet its short-term and long-term financial obligations.
What is the meaning of financial statement and its importance? ›
Financial statements are written records that convey the financial activities of a company. Financial statements are often audited by government agencies and accountants to ensure accuracy and for tax, financing, or investing purposes.
What is the importance of a statement of financial position? ›
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.
What is the most important of the financial statements? ›
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.
Why is it important to provide financial statements? ›
Financial statements are a very important tool for all businesses, as they allow shareholders close shareholdersA part owner of a private or public limited company., managers and investors to make informed future business decisions and understand the performance of the business over time.
What are the three uses of financial statements? ›
To serve as a financial foundation for tax assessments. To provide valuable data for foreseeing the company's future earning capacity. To provide accurate information on the fluctuation of economic resources. To offer information on the organisation's net resource changes.
What are the three main financial statements? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are the four main financial statements? ›
There are four primary types of financial statements:
- Balance sheets.
- Income statements.
- Cash flow statements.
- Statements of shareholders' equity.
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 is financial statement in your own words? ›
What is a financial statement simple definition? A financial statement is a document that summarizes an individual or business's financial position, including assets, liabilities, and net worth. It is used to assess the financial health of an individual or business.
Financial statements are a set of documents that show your company's financial status at a specific point in time. They include key data on what your company owns and owes and how much money it has made and spent. There are four main financial statements: balance sheet. income statement.
