A financial statement is a medium that communicates the activities of an organization to interested parties in and outside an organization. A crucial tool for managing your firm is a set of financial documents. They provide important information on the performance of your company’s operations and are a snapshot of its financial situation. Additionally, they serve as the basis for determining your future course.
Bankers, investors, and others use financial statements to judge the strength and liquidity of your company and make decisions that have an impact on it. “Financial statements enable you to make informed financial decisions to make sure your firm is as successful as it can be”. says Grant Godfrey, a Senior Account Manager at BDC. They also demonstrate the viability of your organization.
Financial statements are documents that describe a company’s operations and financial performance. Government organizations, accounting companies, etc. frequently audit financial statements to guarantee accuracy and for tax, financing, or investing purposes.
FEATURES OF FINANCIAL STATEMENTS
- The Financial Statements should be appropriate for the intended use. Avoid making unnecessary or confusing disclosures, and make sure the public is informed about all pertinent and important disclosures.
- They should provide complete and accurate information about a company’s performance, position, development, and prospects. It is also crucial that people who create and present the financial figures prevent the facts from being misrepresented by their own biases.
- They have to be easily comparable to earlier assertions or to those made about issues or industries that are similar to yours. The usefulness of financial statements is increased through comparability.
- They must be provided in a classified format to enable more accurate and insightful analysis.
- The financial statements need to be prepared and delivered on schedule. The importance and usefulness of these comments would be diminished if they were prepared with excessive lag time.
- The financial statements must be generally regarded as understandable and acceptable. Only by using specific “generally accepted accounting principles” throughout their preparation can this be accomplished.
- Inconsistencies resulting from the accountant’s subjective decision-making and procedural choices shouldn’t have an impact on the financial accounts.
- Financial Statements shall adhere to all applicable legal requirements in terms of format, the information provided, and disclosures made.
IMPORTANCE OF FINANCIAL STATEMENTS
- Management Importance: The management can create appropriate policies and future courses of action by giving them information on the reasons behind business results. The management defends its actions and hence its existence to other parties only through these financial statements, which also signal to them their performance. A comparative study of financial accounts indicates the trend in the development and position of the business and enables management to make appropriate changes to the policies to avoid undesirable scenarios.
- Importance to Shareholders: These disclosures give shareholders information about the management’s efficiency and effectiveness as well as the company’s earning potential and financial stability. The potential shareholders could decide whether to participate in this company by evaluating the financial statements to determine the company’s ability to make a profit, its current position, and its prospects. For potential investors, published financial statements are the primary source of information.
- The financial statements are important to creditors and lenders because they provide information on a company’s liquidity, profitability, and long-term solvency position. This information is important to both parties. They could use this information to decide on their future course of action.
- Relevance to Labor: Employees are eligible for bonuses based on the amount of profit as revealed by the audited profit and loss statement. The revenue statement thus assumes significance to the workforce. The amount of earnings and profitability realized is also incredibly important when negotiating salaries.
- Financial statements are also necessary for several regulatory organizations, including tax authorities and the Registrar of Companies. By analyzing the financial statements, they may decide whether or not the regulations are being carefully adhered to, as well as whether or not they are having the desired effect.