The Purpose of Financial Statements to Business Organization

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:

  • Shareholders
  • Management
  • Employees
  • Creditors
  • Lenders
  • Potential investors
  • Customers
  • Suppliers
  • Competitors
  • 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.

Conclusion

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.

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4 thoughts on “The Purpose of Financial Statements to Business Organization

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  4. When someone writes an article he/she keeps the image of a user in his/her brain that how a user can know it.
    So that’s why this article is outstdanding. Thanks!

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