Uses and Importance of Financial Statements

The financial statements are too essential as well as necessary for the business entities and the organizations as it shows the financial position of the business and also define the performance of the company. Moreover, it helps the management of the business, including the stakeholders, financial analysts, investors, etc. to evaluate and opt for suitable investments and take required economic decisions for the company by making the comparison of present and past performance and with this, they estimate the future growth and performance of the business.

Use of Financial Statements

The general and most common use of the financial statements is providing information about the outcomes of operations, cash flows, financial position, etc., of a business or a company. This information is used to make appropriate and needful decisions to allocate the resources appropriately, and this process is done by the readers of the financial statements. However, there is a different function integrated with every single type of financial statement at a more advanced level. Moreover, the income statement tells the reader about the capability of a business to make a profit from the generated revenue. In addition, it discloses the amount and number of sales and the different types of expenses at the same time, depending on how the information of expenditure is aggregated. These statements are also helpful in analyzing the trends of the company operations when reviewed several times.

Another purpose or use of the balance sheet is to give readers information about the present condition of the business as of the date written on the balance sheet. Moreover, this information can be used for estimating the funding, liquidity, debt position of the business, as well as it is the basis for an amount of the ratio of liquidity. Lastly, the cash flow statement is used to show the nature of cash disbursements and cash receipts by a number of different categories. This information can be utilized considerably, so the statements of cash flow do not match the expenditure and sales every time that is shown in the income statement.

Important Applications of Financial Statements

Report on stewardship function – The most common as well as primary objective or purpose of making the financial statements is to show how the company or the business is performing. This information is shared with the owner, stakeholders, shareholders, etc., of the company. Moreover, it makes a clear image of the actual performance of the business as compared to what owners expect from the business.

Better decision making – After knowing the financial situation of the business, it becomes easy for the owners of the business to make a better decision that can make the business grow more and improve the mistakes made in the past by the management of the business. Moreover, all this helps in achieving the desired targets of the business.

The basis for fiscal policies – The government is also interested in the information which tells the financial condition of the company. This is because that information is used by the government as an input which becomes the basis for fiscal policies.

Importance of Balance Sheet

The balance sheet represents the actual position of the business in monetary terms, which gives detailed and brief investments of the asset investments of the business. The balance sheet, too, has the debt and equity levels of the company. This capital mixture assists the creditors as well as the investors to understand well the performance and the condition of the company at the same time.

Importance of Income Statement

The format of the income statement comprises sales, losses, profit, and expenses at the same time. Moreover, the investors can get help in evaluating the company’s performance in the past and assume its future cash flows by using these statements. The US GAAP and IFRS also have dissimilarities in the categorization of actual expenses. Notably, the essential expense of discontinuing operations and depreciation is also seen differently.

Importance of Cash Flow Statement

The statements of cash flow represent the inflow as well as the outflow of the cash in the interior and outside of the business at the time of the financial period. This provides an idea to the investor whether the company has adequate funds to pay for its expenses and make essential purchases or not.

Conclusion

The uses and importance of financial statements study material conclude that there are various and multiple essential as well as essential uses and applications of the financial statements in a business which helps in multiple ways to the business. It helps in making decisions, defining the financial condition of the company, planning for the future cash flows, etc.