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Purpose of financial statements by business entities

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  • Purpose of financial statements by business entities

    Purpose of financial statements by business entities:

    "The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions."[2] Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position.

    Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."[2] Financial statements may be used by users for different purposes:

    * Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders.

    * Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.

    * Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.

    * Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.

    * Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.

    * Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.

    * Media and the general public are also interested in financial statements for a variety of reasons.

  • #2
    Re: Purpose of financial statements by business entities

    Financial statements, which are accounting reports, serve as the principal method of communicating financial information about a business entity or an individual to outside parties such as banks and investors. In a technical sense, financial statements summarize the accounting process and provide a tabulation of account titles and amounts of money. Furthermore, financial statements report the financial position or financial status of a business or an individual as well as financial changes at a particular time or during a period of time. The basic purpose of financial statements is to communicate to external and internal parties information about financial decisions that have been made.

    General purpose financial statements are designed to meet the needs of many diverse users, particularly present and potential owners and creditors. Financial statements result from simplifying, condensing, and aggregating masses of data obtained primarily from the financial system. They are an output of the accounting system.

    Companies release financial statements at least once a year for their accounting period. Companies either follow the calendar year beginning January 1 and ending December 31, or they follow their own fiscal year, which can be any complete 12-month period. Consequently, companies have either calendar-year accounting periods or fiscal-year accounting periods. In addition, businesses frequently prepare financial statements quarterly or whenever necessary, which are referred to as interim statements.
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    • #3
      Financial statement is very important especially for the business management and stockholders. Statement is important for management because it speaks about the success of the company where management needs to know if the strategy for the business is effective or not. For the stockholders it is important also because it will be the basis if they will invest on the company or not. Financial statements can tell if the company lost money or made more money.

      Regards,
      OBP Accounting Solutions Company in Australia

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