Financial Statements’ Purpose and Importance

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There are four basic financial statements for any modern business enterprise. A Balance sheet, statement of returned earnings or income statement, statement of cash flows, and the statement of shareholders equity are the major financial statements in a modern business setting. The financial statements represent the financial position of the business enterprise in question. In a business enterprise, many transactions are recorded. The complexity and the number of business transactions make it difficult to define the financial situation of the business without the financial statements.

One of the most important financial statements in any business enterprise is a balance sheet. This document shows the worth of a company’s assets. In this essence, the value of the creditors, debtors, and the total assets of the company are included in the balance sheet. The value of shareholders’ interests in the business can be indicated. In addition, the balance sheet displays the total liabilities of the business enterprise.

In the balance sheet, the value of the shareholder’s interest is added to the liabilities and must be equal to the total value of the assets. The two values are supposed to be equal to each other if the figure on the balance sheet is correct. Shareholders’ interest refers to the value that would be left if all company’s assets were liquidated and all liabilities were cleared. It is the value of the company that would be left for the shareholders if the company were to be dissolved and liquidated (Kimmel et al, 2011).

In a financial period, a business enterprise may need to declare the total income or the net benefits of the company within the particular period. This report is known as the statement of returned earnings. This document is also referred to as an income statement. A business uses an income statement to declare the amount of net profit made during a specific financial period or to indicate the magnitude of losses incurred over the period for which the statement is prepared. This statement describes a company’s ability to finance its cost of production and distribution, and still generate extra earnings. In this essence, the statement is used to evaluate the performance of the company (Kramer & Johnson, 2009).

In most companies, liquid cash is used in transactions. Due to this, the company needs to monitor the movement of cash either into the company or out of the company. A statement of cash flow is the document that is used to indicate the pattern of flow of cash in the company. The document is used to establish the proportion of profit that consists of liquid cash (Kimmel et al, 2011).

Another statement that is necessary for describing the financial situation in a company is the statement of shareholders’ equity. This statement describes the value of shareholders’ interest in the business. The change in the value of shareholders’ percentage of ownership in the business is shown.

Financial statements are important to the managers of a business enterprise. The statements are analyzed to reveal the true financial position of the company after considering all factors. Managers are then able to plan business strategies for their company. In addition, financial statements are crucial for the administration of a business enterprise when an important decision is being made. Moreover, the financial statements give the managers a comprehensive understanding of business transactions over a specific financial period.

At the end of the fiscal period, the managers of a company can make a disclosure of the financial position of the company to the shareholders and the public. Employees of a company are also entitled to a briefing to inform them of the financial position of the company. Depending on the financial position of the companies, the employee can negotiate better working conditions. In addition, the employees are able to negotiate for better contact terms depending on the financial position of the company (Kramer & Johnson, 2009).

Once a company has revealed its financial position through the financial statements, the shareholders in the company are able to know their next move regarding the shares they own in the company. The government, which is an external user of the financial statements, is able to collect revenue due from the company through the financial statements. The amount of tax to be paid by the company to the government is determined through evaluation of the financial statements. Prospective investors need to know the financial state of the company before they make a financial commitment to the company. This way, the financial statements are important to the investors since they enable them to make the right decision when investing.

Any business enterprise needs capital to facilitate it business activities. One of the major sources of the capital in a company is the creditor of the company. Some considerations are made by the creditors such as financial institutions before availing capital to a company. To ascertain the true financial position of a company, the creditors must evaluate the financial statements (Kramer & Johnson, 2009). In this essence, the creditors are assisted by a company’s financial statements to make good lending decisions.


Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: tools for business decision making (6th ed.). Hoboken, N.J.: John Wiley.

Kramer, B. K., & Johnson, C. W. (2009). Financial statements demystified: a self- teaching guide. New York: McGraw-Hill.

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BusinessEssay. "Financial Statements' Purpose and Importance." October 20, 2022.