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A financial statement is a summary of a company’s financial performance over a certain reporting period, and it represents a formal record of financial transactions taking place in an organization. It is often included in the annual report, and a good deal of the information present in the report is required by law or by accounting standards.

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However, financial statements are important and it contains significant information about a company’s financial health and business activities. Financial statements help companies make informed decisions and they highlight which areas of the company provide the best ROI (return on investment). Also, companies must file important financial statements once a year because it provides financial information that investors, creditors, and analysts use to evaluate a company’s financial performance. It is an important tool for companies as it helps senior managers to communicate past successes as well as future expectations.

There are generally three different sections to a financial statement. These include assets, liabilities, and equity. These sections are further divided into different subsections. These include current assets/liabilities, long-term assets/liabilities, revenue sources, and expenses.

IT’S IMPORTANCE TO MANAGEMENT:

The increase in size and intricacies of aspects influencing the business functions requires scientific and strategic access in the management of contemporary trading concerns, so the management team needs up-to-date, precise, and methodical financial data for the intentions.

Financial statements assist the management in comprehending the progress, prospects, and position of the business counterpart in the industry.

The financial position helps the management in understanding the performance of the company in comparison to the other businesses and the sector.

Providing management with accurate information enables them to form proper policies for the companies and take correct decisions.

The performance of management is ranked by these statements, the performance of these statements will help management justify their work to all the parties involved in the business.

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ITS IMPORTANCE TO THE SHAREHOLDERS: Management is detached from control in the case of companies, and shareholders cannot take part in day-to-day business pursuits. However, the outcome of these pursuits should be disclosed to shareholders during the annual general body meeting in the form of financial statements, because it shows the changes in various equity components including retained earnings, during a period.

SHOWS THE FINANCIAL STATE OF THE COMPANY

A financial statement is a major concern to investors and creditors because as sources of finance for a company’s operations, investors and creditors rely on financial reports to gauge conditions for both the safety and profitability of their investments. More specifically, investors and creditors need to know where their money went and where it is now.

Your financial balance sheet addresses such issues by providing detailed information about the company’s asset investments. The balance sheet also lists a company’s outstanding debt and equity components, so debt and equity investors can better understand their relative positions in a company’s capital mix. When a company issues financial statements, it provides information to investors and creditors. This information details how the company is doing financially and with this information, investors can decide whether they should invest in a company. Alternatively, current investors will be able to decide if they want to continue to invest in the company.

SHOWS THE VARIOUS EXCHANGE OF CASH CARRIED OUT BY THE COMPANY

The cash flow statement is part of the financial statement that shows the inflow and the outflow of the cash flow in and out of business during the financial period, and it is important because it shows the exchange of cash between a company and the outside world during a period, and so the investors can know if the company has enough cash to pay for expenses and asset purchases. The company profits reported in the income statement can be difficult to interpret and most likely contain certain non-cash elements, providing no direct information on a company’s cash exchange during the period.

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This article was first published on 16th March 2022

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