In order to fully understand the purpose behind the presentation of financial statements, we must figure out why they are important. A company’s financial statements provide various financial information that investors and creditors use to evaluate a company’s financial performance. Financial statements are also important to a company’s managers because by publishing financial statements, management can communicate with interested outside parties. A company’s financial conditions are of a major concern to investors and creditors. As capital providers, investors and creditors rely on a company’s financial conditions for both the safety and profitability of their investments. More specifically, investors and creditors need to know where their money went and where it is now. Different financial statements focus on different areas of financial performances. Financial conditions shown in the balance sheet are snapshots of a company’s assets, liabilities and equity at the end of a financial reporting period; they don’t reveal what happened during the period from operations that may have caused changes to financial conditions. Therefore, operating results during the period also concerns investors. The income statement reports operating results such as sales, expenses and profits or losses. Using the income statement, investors can both evaluate a company’s past income performance and assess the uncertainty of future cash flows. A company’s profits reported in the income statement are accounting income and most likely contain certain non-cash elements, providing no direct information on a company’s cash exchange during the period. Moreover, a company also incurs cash inflows and outflows during a period from other non-operating activities, namely investing and financing. To investors, cash from all sources, not just accounting income from operations, is what pays back their investments. The importance of the cash flow statement is that it shows the exchange of cash...
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