Uses and Importance of Financial Statements

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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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