Financial statements are written records that highlight the firm’s activities and the financial status of a business. The report is examined by government firms, accountant, and agencies etc. to guarantee efficiency which can be used for financing, tax, and investing purposes.
Financial statements are categorised into three different parts.
- Balance sheet – It presents a description of the financial status of the organisation; it’s liabilities, assets, and stockholders’ equity.
- Income statement – It gives an insight on revenue, expenses, profit & loss report, and comprehensive income. It also reports on the company’s operations.
- Cash flow statement – It shows an entity’s cash flows and if there are any changes, including investing, financing activities, and operating for the reporting period.
|Five top points why Financial Statement is important
Uses of Financial Statements
- Bridging the Gap in Management – The financial statements reveals a firm’s financial accomplishments (profits and liabilities). It conveys how fruitful a company’s choices and decisions have been. So, it assists in bridging the gap between the management and the owner’s expectations.
- Assist Creditors – This statement is mostly used by creditors, investors, and market analysts to analyse and estimate the financial strength and future potential and profits of a firm.
- Give an insight to Investors – Financial analysts and investors depend on such financial statements to examine the business performance and predictions about the company’s future stock price. The most important reliable financial data is the annual report, which reports all the businesses financial statements.
- Government Use – Governmental policies associated with corporates rely on financial statements as it shows how companies are operating. Depending on the report, the government decides on policies and taxation.
- Support for Stock Exchanges – Various stock exchange and regulatory bodies depend on an organization’s internal matters to protect the investors. Stock advisers refer to this statement to fix a quotation as it is believed to be a great source of information. SEBI, NSE and BSE are few such examples.
- Knowledge of Investments – A company’s shareholders depend on these statements to get an insight into their investment growth. If a business is making profits, then they might think of investing more money. Similarly, losses or even stagnant gains may trigger them to stop their investment.
Limitations of Financial Statements
- Does Not Reflect Current Financial Position – The statements don’t reveal how good a firm is doing in the present time as it is prepared at the end of every fiscal year.
- Chances of Bias – It does not give an accurate representation of a firm as it is formed on several individual conventions, judgments and internal policies.
- Important Information for not specified – The accountants tend to miss vital facts while preparing financial statements. Such as the nature of agreements signed by the firm.
- Absence of Qualitative Details – Though the entire finance and numbers are mentioned in the annual statements, a lot of qualitative data can be missed out. Such as the firm’s employees’ productivity and industrial relations
- Insufficient Details – The reports include the value of the total assets of assets, but do not publish these assets nature.
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