Explain the Importance of Financial Statement

A financial statement is an important report which describes how a business is doing. Before we explain the importance of financial statement, we need to know that it is a statement which is very crucial for an organization’s board of directors, stockholders, its managers, supervisors and employees. External to the organization, financial statement is important to the investors, to government delegates which are responsible for regulating and taxing, to money lenders such as banks and other financial institutions, and to stockbrokers and analysts in investment.

Basic Parts of Financial Statement

Financial statements consist of three basic parts namely balance sheet, which includes all of the assets and liabilities of the company at the end of the financial period; a profit-and-loss statement, which describes the performance of the company, right from the beginning to the end of the financial period; and a cash flow statement that shows where and how the money of the business was used and from where it was acquired during the period of accounting.

Balance sheets can provide information on things such as how much the firm has borrowed or how much is its stock list or has it lent too much and all the details regarding who owes the company, who does the company owe to and what assets it possesses. Analysis of the profit and loss statement can provide information on whether the volume of goods sold by the company are high enough or not, whether sufficient profits are achieved and what the costs of the company are. Analysis of cash flow statement can show whether financial requirements were met through the funds generated internally or were borrowed from other sources.

Importance to the Firm

It is necessary for all the public companies, to prepare reports showing the financial performance of the company, at regular intervals. Most of the companies prepare annual income statements. Some companies prepare the statements semiannually, quarterly or may even go for monthly statements.

Importance to Managers

Financial statements are especially useful to the managers of businesses. By thorough analysis the managers will be able discover not only the problems, but also find corrective measures required through financial statements. They will also be able to formulate projections, which serve as goals and standards for the next accounting period. At the end of the accounting period, they can evaluate the performances against the projections made.

Importance to Others

Financial statements are required by the present and prospective investors and money lenders, which will help them in making investment and lending decisions. During board meetings and stockholder meetings, financial statement copies are handed out to all the participants. Money managers, analysts, brokers and other agencies thoroughly inspect these statements before making any recommendations. Many suppliers and clients of businesses ask for financial statement of the company, to stay informed.