Purpose of Financial Statements By Business Entities
"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions." Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position.
Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently." Financial statements may be used by users for different purposes:
- Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders.
- Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.
- Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.
- Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.
- Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.
- Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.
- Media and the general public are also interested in financial statements for a variety of reasons.
Read more about this topic: Financial Statement
Famous quotes containing the words purpose of, purpose, financial, statements, business and/or entities:
“The purpose of getting power is to be able to give it away.”
—Aneurin Bevan (1897–1960)
“How still the evening is,
As hushed on purpose to grace harmony!”
—William Shakespeare (1564–1616)
“In full view of his television audience, he preached a new religion—or a new form of Christianity—based on faith in financial miracles and in a Heaven here on earth with a water slide and luxury hotels. It was a religion of celebrity and showmanship and fun, which made a mockery of all puritanical standards and all canons of good taste. Its standard was excess, and its doctrines were tolerance and freedom from accountability.”
—New Yorker (April 23, 1990)
“The wise man regulates his conduct by the theories both of religion and science. But he regards these theories not as statements of ultimate fact but as art-forms.”
—J.B.S. (John Burdon Sanderson)
“It is the business of the wealthy man
To give employment to the artisan.”
—Hilaire Belloc (1870–1953)
“Experimental work provides the strongest evidence for scientific realism. This is not because we test hypotheses about entities. It is because entities that in principle cannot be ‘observed’ are manipulated to produce a new phenomena
[sic] and to investigate other aspects of nature.”
—Ian Hacking (b. 1936)