Financials statements help to know your financial status is on a regular basis and also help to provide information about performance and changes in the financial position of a company. This statement can be used to make informed decisions regarding the allocation of resources
Before going into the detail of financial statements it is very important to know about the elements of financial statements.
Financial Statement types
- Income statement or statement of financial performance
- Balance sheet
- Statement of cash flow
Elements of Financial Statements
Purpose of maintaining financial statements are as follows
Monitor the progress of the business
The business needs to maintain good records to monitor the progress of the business. Records can show whether your business is improving which items are selling or what changes are needed to be made.
Good records can help to increase the business development
Identify the sources of income
Them money or property can be received from different sources. The financial statements can identify the sources of income. The information helps to separate business from non-business receipts and taxable and nontaxable income.
Financial performance of the entities has been provided
The main purpose of financial reporting is to provide the entities financial information. This serves as a conceptual framework for all the entities who provide the financial performance of the company.
Provide assistance to existing entities
Assistance to entities has to be provided anal explain that whether they should invest in the existing investments or which investments can be harmful to the company
These statements are the core backbone of the company that could help the investors and also, they could get an overview of the company’s financial performance. The investors could get the financial assessment of the company and help them to take important decision of the company. If the investors want to know the company’s financial stability then these statements are a road map to provide the companies economic stability.
The investors mostly use financial statements to provide a financial calculation of the company.
To have an overview of the Prospective future Cashflows
This provides an overview of the future economic performance of the company. They also give a future prediction to the investors of the company and also help them to know about any future risks of the company.
The potential and existing investor could use the financial statements to assess the potential adverse effect on the company perspective on the cash flow. The management and directors use the company’s resource effectively and efficiently. That is the reason why there are so many disclosures require on the financial statements
You may be interested in reading: Key Roles & Functions of Financial Accounting Within an Organization
Additional Purposes Financial Statements:
- The creditor will get to know the creditworthy ness of the company. Evaluation of credit score requires both financial and non-financial information. As per the perspective of financial reports those statements contain much beneficial information to assist this.
- They also help employees in assessing the stability of the company. Employees want to see the company that they working to run forever. They want to secure their job. If they could assess the company’s financial statements, they will access
- Government agency can get help to assess the tax return. Corporate tax and general tax gas to be paid by some of the entities and the financial statements have to assess whether tax has been completely collected.
- They also help the banker to make a risk assessment. Bankers and creditors need the entity’s financial statements to assess the ability to pay the debt.
Financial statements are important for any business. Without maintaining a proper record, it would be very challenging to determine the exact financial picture of the company and point out any flaw in the workings of the entity. When the company develops and grows the audit process would grow more complex.
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Why is it important to keep a proper record?
Financial records can identify the source of the receipts. The information needed to separate business from your personal receipts and taxable and nontaxable income. It is very important to keep a system to track all the expenses.
What is the type of records?
- Property records
- Accounting papers
- Legal papers
- Personal and political papers
Learn more: Inventory audit procedures
What are the benefits of financial statements?
Financial statements separate your assets from liabilities and give you a picture of what you owe what you are bringing in.