Tuesday, January 26, 2021

Importance of Financial Statements | Why Do We Need Financial Statements?

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.

Importance of Financial Statements

Why Do We Need Financial Statements?

 Financial statements are formal records that provide details of the entity's financial information including expenses, revenues, debts, assets, liabilities, stocks, cash flows, shareholder contribution, etc.


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.

No comments:

Post a Comment