The Importance of Financial Statements

Topics: Income statement, Balance sheet, Financial statements Pages: 2 (537 words) Published: May 22, 2012
The importance of financial statements in a business is great. There are several difference reasons for a business to need financial statements. Yet first, financial statements need to be explained in order to know how they are used.

Financial statements usually present the picture of the financial health of a given entity. It is also critical that a business comes up with accurate financial statements, not only for their record keeping for for the purpose of satisfying external reporting expectations. In many ways, financial statements offer an essential glimpse into the financial health of the business, but they are only good for that specific period that they are used in (month, quarter, year). These statements are not only used by the company to see how the flow of business is going, but they are also used by external users.

Some of the external users are:
Institutional Investors- these comprise of investors who use the statements to assess the financial strength of a company in order to make a logical investment decision

Financial Institutions- these is a group of banks and other lenders that use financial statements to decide whether to help the company with working capital or to issue debt security to it.

Government- Financial statements are used by the government to analyze whether the tax paid them is accurate and is in line with their financial strength.

Vendors- this group of people extend credit to a business and use statements to determid if they business is credit worthy

These statements need to be accurate in order to help investors decide if they want to invest in a business venture. They will also come up with detailed evaluations of the viability and financial stability along with strength of the company before making the decision to invest or not.

The parts of a financial statement includes:
Income Statements- present a summary of a business entity's revenues and expenses for a period of time. This allows outsiders to...
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