Objectives of Financial Statements

What are Financial Statements?

Financial Statements are statements that serve as a means of communication between the organization and different users of financial statements regarding the financial position and profitability of the business at the end of a financial year. The financial statements of an organization also help them in different analyses, such as Credit Analysis, Debt Analysis, Security Analysis, and General Business Analysis. To ensure the reliability and accuracy of the financial statements, firms, accountants, government agencies, etc., audits the statements....

Objectives of Financial Statements

The first objective of preparing financial statements is to present an organization’s true and fair picture of its financial performance. The second objective of preparing financial statements is to present an organization’s true and fair picture of its financial position. The third objective is to provide detailed information to different users of the financial statements about the resources of the company. The last objective of preparing financial statements is to help the owners and management of an organization in the decision-making process....

Need for Financial Statements

An organization needs financial statements to communicate its performance, profits/losses, and financial position to the different internal and external users. The organization can indicate its performance and profits/losses through the Trading and Profit and Loss Account. However, it can indicate its financial position through the Balance Sheet....

Types or Components of Financial Statements

1. Trading and Profit and Loss Account...

Format of the Financial Statements

Trading and Profit and Loss Account...

Users of Financial Statements:

Competitors: Companies competing against each other require financial statements of its competitors so that they can evaluate its performance and financial conditions. It helps them gain knowledge about the firm’s competitive strategies and make decisions accordingly. Company Management: The management of an organization uses its financial statements to have a better understanding of its liquidity, profitability, and cash flows. It helps the management in making financing and operational decisions accordingly. Employees: An organization can also provide its employees with financial statements, with detailed explanations regarding the elements of the documents. Organizations do so to increase the involvement of employees and help them better understand the business. Investment Analysts: Individuals or a group of individuals hires investment analysts to know about the securities of different companies. Therefore, the investment analysts use financial statements and decide whether or not they should recommend them to their clients. Rating Agencies: Different rating agencies or credit rating agencies use financial statements so that they can review them and give a credit rating to the organization or its securities. Lenders: The lenders use financial statements of the borrower companies to estimate their ability to pay back the loan along with the interest charges. Suppliers: Suppliers to an organization often provide them with the supplies on credit. These suppliers use the financial statements to decide whether or not they should extend the credit to the organization. Investors: As the investors of an organization are its owners, they require the financial statements to understand their investment’s performance and results. Governments: The organizations under the jurisdiction of a government have to provide them with their financial statements at their request. The government uses the statements to evaluate the taxability and tax paid by the organization....