It is important for a business to know what are the uses of financial statements. A financial statement is essentially a document, which consists of all the specifications of the happenings of the organization during a particular interval of time. This statement basically consists of balance sheet, profit and loss statement, cash flow statement and a statement of change in equity. These reports present different information about their usefulness.
Financial statements are mostly used to know about the course of future of the organization. They are useful to both internal users as well as external users of the organization.
The internal users of financial statement are the managers of the organization who plan, organize and operate daily business activities. They are associated directly with the firm and require managerial accounting, which consists of in-depth analysis and reports useful in determining the strengths and weaknesses related to finance. Management, human resources, finance and marketing departments fall under the category of internal users.
External users are the individuals who are outside to the organization, and they need accounting information to make financial decisions. Investors, financing institutions, government taxing authorities, and clients come under category of external users. For example, an external user like a creditor requires accounting reports, to assess the risks in granting of credit. External users receive only limited information about financial statement from the company. These statements help in providing crucial information to the external users, which tells them about the economic position of the company. Bankers require financial statements, to evaluate the performance and financial position of a company, for the purpose of loan approval.
The main purpose of financial statement is to report whether the operations carried out by a company over a period of time were successful or not. The financial statement discloses the revenues of the company, followed by it expenses. Users of financial statement can analyze the payment practices of dividend, by evaluating the statement of retained earnings. Sometimes investors look for companies with high dividend payment history. Some investors look for companies, which reinvest their earnings to increase the growth of the company.
Financial statement should be able to provide accuracy, complete accountability and credibility of a business in terms of finance. All the entities or organizations, either privately owned or public owned, are required to prepare a complete documentation about their position and financial performance. Income statement of an organization provides an unbiased view regarding the accuracy and credibility of the accounts, drafted by the company to the interested parties such as shareholders and financial institutions.