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.
Read more about this topic: Financial Statements
Famous quotes containing the words purpose of, purpose, financial, statements, business and/or entities:
“Science and art, or by the same token, poetry and prose differ from one another like a journey and an excursion. The purpose of the journey is its goal, the purpose of an excursion is the process.”
—Franz Grillparzer (1791–1872)
“Our purpose in founding the city was not to make any one class in it surpassingly happy, but to make the city as a whole as happy as possible.”
—Socrates (469–399 B.C.)
“The woman who does her job for society inside the four walls of her home must not be considered by her husband or anyone else an economic “dependent,” reaching out her hands in mendicant fashion for financial help.”
—Mary Barnett Gilson (1877–?)
“The true critic is a scrupulous avoider of formulae; he refrains from statements which pretend to be literally true; he finds fact nowhere and approximation always.”
—T.S. (Thomas Stearns)
“Chief among our gains must be reckoned this possibility of choice, the recognition of many possible ways of life, where other civilizations have recognized only one. Where other civilizations give a satisfactory outlet to only one temperamental type, be he mystic or soldier, business man or artist, a civilization in which there are many standards offers a possibility of satisfactory adjustment to individuals of many different temperamental types, of diverse gifts and varying interests.”
—Margaret Mead (1901–1978)
“The white man regards the universe as a gigantic machine hurtling through time and space to its final destruction: individuals in it are but tiny organisms with private lives that lead to private deaths: personal power, success and fame are the absolute measures of values, the things to live for. This outlook on life divides the universe into a host of individual little entities which cannot help being in constant conflict thereby hastening the approach of the hour of their final destruction.”
—Policy statement, 1944, of the Youth League of the African National Congress. pt. 2, ch. 4, Fatima Meer, Higher than Hope (1988)