Financial
statements are important because they provide financial information that
investors, creditors, and analysts use to evaluate the financial performance of
a company or organization.
Why Do We Need Financial
Statements?
What are Financial Statements?
The financial statements are written reports used by market analysts, investors, and creditors to evaluate a company's financial health and make decisions regarding the allocation of resources.
The financial statements include information about
“debts, sales, taxes, and financial items” and explain the balance sheet,
company income statements, and cash flow statements.
All of these data
are examples of financial statements because fundamental analysts rely on these
documents to evaluate institutions that are making good investments.
Financial statements aim
to provide integrated information about the results of operations, the
financial position and cash flows of the organizations.
Data analytics use this
information and make financial decisions regarding resource allocation, etc.,
and the purposes differ in different financial statements.
For example, the “income
statement” in the financial statements explains the company's ability to
make a profit, reveals the volume of sales and the nature of the different
types of expenses. This provides an opportunity to use it to analyze
trends in the results of enterprise operations.
The balance sheet
in the financial statements shows the current state of business activity as of
the date on which the budget was listed, and enables reading of the data to
estimate the liquidity, financing and debt position of the enterprise.
Cash flows in the financial statements show the
nature of cash receipts and expenditures. Cash flows have a great benefit
because they always match the revenues and expenses shown in the income
statement
We can say that financial
statements are very important because they provide essential
information about a company's income, expenses, profitability, and
debt.
Financial
statements provide comprehensive information about the financial position
of institutions and the changes that occur in their financial position. This
information guides a wide range of users in economic decisions, whenever the
data is understandable, relevant, reliable and comparable.
Business owners and
managers need financial statements to make important business decisions. And
financial analysis is performed on the financial statements, to provide
management with a clearer understanding of the entities.
The Importance of Financial
Statements
Financial statements
contain important information about the company’s financial health and
accurately reflect the business performance and financial position of the
company.
Financial statements are
one of the most important elements in a business environment. The importance
appears in a leading role for the parties who shape this environment, and this
importance is summarized according to the following:
Financial statements help
all stakeholders including management, investors, financial analyst, etc. to
evaluate business performance, operations and cash flows, compare past and
current performance, forecast future performance, and make informed decisions
accordingly.
Financial statements
provide investors with tremendous information about the company's income and
expenses, profitability, debt burdens, and ability to meet its short-term and
long-term financial obligations.
Financial statements are
important to creditors because they provide a comprehensive look at the
financial health of a business and help creditors determine whether the company
represents sound credit risk, as well as its ability to repay a debt as agreed.
Financial statements help
them calculate the liquidity ratio in order to assess the current financial
position.
The economic condition of
a nation is determined by gathering financial reports from various industrial
sectors.
Governments use financial
statements to determine the value of taxes incurred by enterprises in the
business sector.
Financial statements are beneficial
for assessing the tax liability of a business concern, and they help tax
authorities ensure the accuracy of the taxes and surcharges declared and paid
by the company. These statements also provide information on the extent to
which entities comply with laws and regulations and help study the state’s
economic situation.
Financial statements are
important to management; This is due to their ability to evaluate various cost
centers; they assist management in applying cost control and determining the
nature of work to be applied in the future.
Financial statements are important to banks; The bank seeks to ensure the security of the money borrowed from it and to determine the extent to which customers are able to pay the value of the interest on a regular basis. Therefore, the bank uses the financial statements to activate control over plans, determine the security amounts, and indicate profits and losses.