Role of Financial Statements

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Financial Statements-Meaning

After setting a goal of the corporation and designing the tasks and decisions accordingly the duty of the corporate manager is to report the stakeholders about the corporation’s affairs. The shareholders are the real owner of an organization. Therefore, corporate managers have to report the shareholders about the organizational financial matters that affect their wealth. Various reports are prepared to report shareholders. The Annual Report is the basic document published publicly by the organization. The chairmen of the board present annual reports in the annual general meeting.

The financial statements include the basic financial information about expenses, revenues, assets, liabilities, and cash flows during a specific time. Financial statements report what happened to the firm in terms of assets, liabilities, dividends, and so on in a specific period. Based on this information obtained by the financial statements, stakeholders can go on revising their expectations about the timing and riskiness of the firm’s cash flows. Therefore, understanding the financial matters through different financial statements is important for stakeholders, creditors, other investors, and the organization’s management.

The financial statements are prepared based on generally accepted accounting principles (GAAP). The preparation of financial statements is the duty of top-level management of an organization. They contain summarized information on the firm’s financial affairs.

The balance sheet and income statement (profit and loss account) are the traditional basic financial statements of a business organization. While they do deliver helpful financial information concerning its operation a grim limitation of these statements is that they do not give information regarding changes in the firm’s financial position during a particular period.

Role/Importance of Financial Statements

Financial statements consist of all the financial information that can be used for analyzing and understanding the performance of a firm. It provides information about the financial position, financial performance, and changes in the financial position of a firm which are crucial for making financial decisions.

The major roles of financial statements are:

Helps in decision making

Financial statements consist of useful financial data, information of the firm which helps in decision making. A proper analysis of financial statements helps a firm to identify its weakness and strength. It is said that a problem recognized is half solved. Hence managers can make important business decisions based on the financial statement which contains all the information regarding the firm’s financial position, financial performance, and all other information regarding finance.

Helps in reporting

A financial statement includes the income statement, balance sheet which represents the historical financial performances of a firm over the period. Such financial information can be used to report to shareholders, creditors, managers, and other stakeholders about the financial condition of a firm. Hence, it can be used for reporting the stakeholders of a firm.

Helps in forecasting

Financial statements also play a great role to provide an estimate of the future financial course of action. The firm prepared Pro-forma financial statements to provide a future forecast of expenditure, revenues, investment, and financing.

Use in the expansion of credit

The borrowed capital of the corporation is made available by lenders or creditors. Before providing the money they see or use the information provided in the financial statement of the corporation. On the other hand, the financial management department of the corporation also uses the information of financial statements to restrict or expand the extent of credit or borrowed capital of the corporation.

Other uses

There are abundant roles in financial statements in firms. Financial institutions, banks, and finance companies use financial statements to decide where to grant a loan or not. Government organizations, such as tax authorities employ financial statements to determine the correctness of taxes affirmed and paid by the firm. Media and the general public are also interested in a firm’s financial statements for many reasons.

Conclusion

Financial statements are one of the major aspects of every business organization that provide a clear picture of the company’s financial health for a particular period of time. Hence, the financial statement provides a basis for decision making helps in reporting and forecasting future and plays a significant role in an organization in many more ways. It presents the position of a firm in terms of monetary values at a particular point in time. They have many tools that help them make a decision but the most important of all are the financial statements that give a good understanding of the company’s financial position. Thus there is a significant role of financial statements of a company.

References  

Paudel, Rajan B., Keshar J. Baral, Rishi R. Gautam, and Surya B. Rana. (2010). Fundamentals of Financial Management. Kathmandu: Asmita Books Publishers & Distributes.

Pradhan, S. (1992). Basis of Financial Management. Kathmandu: Educational Enterprise (P) Ltd.

Thapa, Kiran., Sharma R. Dilli. (2018). Fundamentals of Financial Management. Kathmandu: Khanal Publication Pvt. Ltd.

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