Uses and Importance of Financial Statements
Financial Statements of the Company present the overall financial position/ performance of the company to its owners and the external parties. They not only help the management in planning and decision making but also serve as a great source of updating the other stakeholders who are interested in the functioning of the company about the financial aspects. These external parties could range from investors, government, employees of the company to the general public at large.
These parties can gain excess of the financial statements from the annual report prepared by the company at the end of the year. The annual report contains the company background, its financial statements, auditors report, directors report, corporate governance report, and management discussion and analysis.
There are various uses and importance of financial statements. Some of them are listed down below:
- Report on stewardship function: The primary objective of preparing financial statements is to present the performance of the company to its owners/ shareholders. This highlights the differences between the expectations in the mind of owners and the management performance.
- Better decision making: The financial statements provide the financial position of the company to the management which helps them to compare the current position with the set targets. This further helps the management in making better and improved decisions for the future to meet the desired outcomes.
- Basis for government policies: The government is also a party that is interested in the performance of the company. This is because the information from the financial statements serve as the input for the fiscal policies of the government.
- Proof of credit worthiness: Corporate undertakings require finance for their day to day operations or for a specific project. For this reason, they borrow funds from various lenders like banks, financial institutions etc. These institutions require a strong financial position of the organisation so as to ensure timely payback of their funds. The financial statements serve as the basis for providing credit.
- Attracts prospective investors: Before investing money, investors tend to evaluate the profitability and overall financial performance of the company. This is done so as to ensure security of their funds. Financial Statements come to the rescue here as they provide detailed information about the profitability of the concern and the security of funds. Thus, Financial statements attract the investors by providing them with the liquidity and solvency position of the company.
- Profitability of investments: Financial Statements provide the shareholders the status of their funds. The shareholders learn about the safety of their funds and the return they can expect on their investments. This helps them to assess whether they want to continue with their investment or withdraw the amount.
- Helps stock exchanges: The stock exchanges use information obtained from the financial statements to make decisions about the prices. Financial statements also provide transparent positions of the company to the stock exchanges. This helps the stock exchanges to protect the interest of the investors who might have invested in the company’s shares.
The uses and importance of financial statements are manifold. They provide information regarding the financial position of the company to its owners and third parties like bankers, government, investors, creditors etc.
Chapter 3 – Financial Statements of a Company
- Meaning and Nature of Financial Statements
- Objectives of Financial Statements
- Types of Financial Statements
- Uses and Importance of Financial Statements
- Limitations of Financial Statements