The purpose of financial statements explains the reasons why organizations prepare and present financial statements. More so, the statements help the users to understand the financial performance and position of an entity. So, they help the users to make informed decisions. However, this article explains the purpose of financial statements to the business organization.
Types of financial statements
Types of financial statements according to IFRS includes:
- Income statement or statement of profit or loss
- Balance sheet or statement of financial position
- Statement of cash flow
- Statement of changes in equity
- Notes to financial statements
Users of financial statement
Users of the statements are the various stakeholders who have interest in an organization. However, they use the statements for different purposes. So, the users include:
- Potential investors
- International communities
- Government, etc.
Purpose of financial statements
However, the purpose includes:
- To provide financial information about a business organization
The statements provide different financial information that helps the users to make informed decisions. These statements show useful information like assets, liabilities, equity, loss, profits, and others. However, the income statement provides information about profit or loss as the balance sheet provides information about assets, liabilities, and equity. Therefore, other statements also provide important information to the users.
- To enhance the decision making of stakeholders
More so, The statements help different stakeholders like investors and others to make informed decisions about an entity. So, it helps investors to determine whether to invest in a company or not. Investors analyze the financial information in the statements while making investment decisions. However, the stakeholders use the information to determine the profitability, liquidity, stability, and others of an entity.
To provide information about the future net cash inflows of the business
Additionally, the users can use the statements to forecast the future cash flows of the business. This can help to assess any negative effect on the cash flow of the entity.
- To assess the effectiveness and efficiency of an entity’s management
The statements also help users to assess how the management of the company uses its resources effectively and efficiently. This is done by assessing whether the objectives and goals of the company are being achieved within a reasonable time.
- To serve as a basis for settling disputes
The users can also use the statements to settle any dispute that may arise during the business operation of the company.
- To enhance understanding of the users
Notes to the statements provide all the disclosure requirements that can help the users to have a better understanding of the statements. However, the disclosure requirements such as accounting policies, breaking down of figures and others enhance the understanding of the financial information.
In conclusion, individual financial statements provide useful information to the users of financial information. However, they use the information to make informed decision based on their interest in the company.
Afeez is one of the founding partners of Marasas Consulting limited. He consults for both individuals and entities in the area of accounting, management, audit, tax, and investment. He has a wide range of experience both online and offline which allows him to provide relevant and timely professional advice and assistance to business owners with their accounting, tax, management, audit, and investment plans.
Afeez is a member of the Institute of Chartered Accountants of Nigeria (ICAN) and a member of the Nigerian Institute of Management (Chartered). He is a certified Google analyst and strategist. He earned his Bachelor degree in Management and Accounting from Obafemi Awolowo University, Ile-Ife, Nigeria, and earned an ordinary national diploma in Accountancy from The Polytechnic of Ibadan, Oyo State, Nigeria. He earned certification in “Excel Crash Course” and “Reading of Financial Statement” from Corporate Finance Institute, Canada.
Afeez is dedicated to helping clients achieve business success by helping them to establish solid and sound accounting, tax, and financial processes.