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 education is to keep a culture from being drowned in senseless repetitions, each of which claims to offer a new insight.”
—Harold Rosenberg (1906–1978)
“Men may construe things after their fashion,
Clean from the purpose of the things themselves.”
—William Shakespeare (1564–1616)
“Because of these convictions, I made a personal decision in the 1964 Presidential campaign to make education a fundamental issue and to put it high on the nation’s agenda. I proposed to act on my belief that regardless of a family’s financial condition, education should be available to every child in the United States—as much education as he could absorb.”
—Lyndon Baines Johnson (1908–1973)
“There is a certain embarrassment about being a storyteller in these times when stories are considered not quite as satisfying as statements and statements not quite as satisfying as statistics; but in the long run, a people is known, not by its statements or its statistics, but by the stories it tells.”
—Flannery O’Connor (1925–1964)
“In business everyone is out to grab, to fight, to win. Either you are the under or the over dog. It is up to you to be on top.”
—Alice Foote MacDougall (1867–1945)
“The variables of quantification, ‘something,’ ‘nothing,’ ‘everything,’ range over our whole ontology, whatever it may be; and we are convicted of a particular ontological presupposition if, and only if, the alleged presuppositum has to be reckoned among the entities over which our variables range in order to render one of our affirmations true.”
—Willard Van Orman Quine (b. 1908)