Importance of Financial Statements

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Financial statements, also known as financial reports, record the financial activities of a business in short and long term. The four financial statements are: balance sheet, income statement, statement of retained earnings, and statement of cash flows. A balance sheet reports the assets, liabilities, and net equity on a company. An income statement reports income, expenses, and profits on a company. A statement of retained earnings shows a company's changed retained earnings. The statement of cash flows shows a company's cash flow activities, such as operating investing, and financing activities (“Financial statements”, 2007, para.1). Financial statements are very important to a company. There are major purposes of financial statements and the type of information they provide is very important. According to “Financial statements”, “'the objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions'” (2007, Purpose of financial statements, para.1). “Financial statements should be understandable, relevant, reliable, and comparable” (“Financial statements”, 2007, Purpose of financial statements, para.1). They are directed towards people who understand business and economic activities and accounting (“Financial statements”, 2007, Purpose of financial statements, para.2). “Owners and managers require financial statements to make important business decisions that affect its continued operations” (“Financial statements”, 2007, Purpose of financial statements, para.2). “These statements are also used as part of management's annual report to the stockholders” (“Financial statements”, 2007, Purpose of financial statements, para.2). However, “employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals...