importance of financial statements
IMPORTANCE OF FINANCIAL STATEMENTS TO THE GENERAL PUBLIC
Importance of financial statement is not what anyone can just keep aside without feeling the heat. A financial statement is very important in every society as many economic and financial decisions are made based on it.
WHAT ARE FINANCIAL STATEMENTS?
Financial statements are those sets of accounts that every quoted company / incorporation is mandated by law to produce for the benefits of its shareholders and other stakeholders. Financial statements have different components because those that have interest in the information it provides are diverse and cannot be satisfactorily represented in one single document.
Before I go on with the importance of financial statements, I would like to firstly list and briefly explain the components of financial statements.
STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
This is an important component of the financial statements that shows the current financial position of a company at a particular date. State of financial position contains information about the values of; assets, and liabilities.
STATEMENT OF PROFIT AND LOSS (PROFIT AND LOSS ACCOUNT)
As the name implies, it tells us whether a business is making a profit or loss over a period of time. Note that while the statement of financial position shows the state of affair at a point in time, statement of profit and loss shows the state of affairs over a defined period.
This document is included to allow us get insight into the ways the company manages cash and cash equivalent at its disposal. It tells you more about investing activities, financing activities and operating activities.
STATEMENT OF CHANGES IN EQUITY
This gives clear picture of movement of owners’ equity.
This document serve the purpose of assuring the users of the statement that the information that they are been served with fairly represents their interest.
The directors’ note gives an overview of the company’s past activities and future plans.
NOTES TO THE ACCOUNTS
This document helps the users of the financial statements understand certain things that would not have been understood if not for the explanation given.
PURPOSE OF FINANCIAL STATEMENTS
The main objective of financial statements is to provide information about the financial position, performance and cash flows of an entity that is used in a wide range of economic decision making. Financial statements also show the result of management stewardship of the resources handed over to them by the owners of the business.
In order to fulfill this objective, the financial statement must provide information about the following aspects of a business entity.
- Income and expenditure- gains and losses included
- Cash flows
Information in other accompanying documents also helps the management to be in a better position to make sound economic decision.
IMPORTANCE OF FINANCIAL STATEMENTS
The importances of financial statements are listed below. Note however that this list is not exhaustive. You can purchase any of the books here for further information.
AIDS INVESTMENT ANALYSIS
One of the importances of financial statements is to aid investment analysis process. Investment analysis cannot be successfully done without the help of information contained in the financial statements. The information contained in the financial statements are so comprehensive that is serves the interest and intention of almost all interested party.
PROVIDES STEWARDSHIP INFORMATION
The divorce of ownership from management made it imperative for there to be a communication line between owners and managers of business. Financial statements perfectly create this medium of communication between the business owners and managers that would have not been there if not for the accounting information provides.
It is obvious that the government rely heavily on information contained in the financial statements for planning. For example, the government base part of its anticipated income on the estimated tax that would be paid by companies. And the companies would be assessed based on the information found in financial statements.
PROMOTES ECONOMIC GROWTH AND DEVELOPMENT
Since financial statements provides information used in analyzing investments and making economic decisions, it then means that one of the importance of financial statements is the promotion of economic activities that are encouraged by investments of all kinds.
I started by telling you what a financial statements is, and goes further to give you brief description of its components and then list and discussed the importance of financial statements.
I believe this approach will give you better understanding of what financial statements are.