Skip to main content

Objective and Users of Financial Statements



Objective of Financial Statements

Financial statements are reports prepared by a company’s management to present the financial performance and position at a point in time. The very basic objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions.

The Financial Statement are prepared to meet the common needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions because

  • They basically portray the financial effects of past events.
  • Do not necessarily provide non-financial information

The statement of financial accounts also shows the results of the stewardship of management or the accountability of management for the resources entrusted to it. Financial Statements helps the stakeholders, both internal as well as external take various decisions.

The financial effects of transactions and other events are grouped into broad categories according to their economic characteristics to give us a true picture of the company as mentioned in the below table.

Elements of Financial Statements

Measures

  • Assets and Liabilities
  • Equity = Capital + Reserves

Financial Position

  • Incomes and Expenses

Statement of Profit and Loss

Users of Financial Statement

Financial statements users include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. These users look forward to financial statements to satisfy some of their information needs. The below table explains the different types of users and the specific information they seek form financial statements.

Users of Financial Statement

What information they need

Investors

Investors being the providers of capital are concerned with the risk and return provided by their investments.

Employees

They are the internal users who look for this information for making decisions

Lenders

Lenders are interested in information which enables them to determine credit worthiness of the company

Trade creditors

Trade creditors are interested in information which enables them to determine whether amounts owing to them will be paid when due.

Customers

These outsiders have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with or dependent on the enterprise.

Government and other agencies

Governments and their agencies look at these financial statements to determine the compliance adherence of the company.

Comments

Post a Comment

Popular posts from this blog

What are the Key Reports a Business Owner Must Track and Which is the Best Tool for it?

As a business owner, you must be already keeping a track of the overall financial health of the business. While you may hire an accountant for end-to-end tasks that will keep your books of accounts updated, it is imperative that as a business owner, you also go beyond the basic understanding of key financial reports to take your business to the next level. The three primary key aspects which would help you as a business owner to get a holistic view of your company’s books of accounts in sync with your business transactions are; Cash Stock and Taxation Cash What is the ultimate goal of any business? To have regular cash flow, right? So, where do we get these crucial insights about cash flow management in order to stay updated with your company’s finances from? Let’s take a look at how these cash flow reports will help you build your business and trigger long term, growth. Cash Flow Cash flow is the amount of money going in and out of your business. Healthy cash flow can help lead your b...
Post a Comment
Read more

Break Even Point: Definition, Formula, Example and Analysis

What is the Break-Even Point? A simple financial tool which helps you determine at what stage your company, or a new service or a product, will be profitable. To put simply, break-even point analysis will tell you the number of products or services a company should sell to cover its costs, particularly fixed costs. Break-even is a situation where you are neither making money nor losing money, but all your costs have been covered. Break-even analysis is useful in studying the relation between the variable cost, fixed cost and revenue. Generally, a company with low fixed costs will have a low break-even point of sale. For example, a company has a fixed cost of Rs.0 (zero) will automatically have broken even upon the first sale of its product. The purpose of the break-even analysis formula is to calculate the amount of sales that equates revenues to expenses and the amount of excess revenues, also known as profits, after the fixed and variable costs are met. The main thing to understand i...
Post a Comment
Read more

6 Tips for Efficient Cash Flow Management

By definition, cash flow refers to the amount of money flowing in and out of the business. The larger the time gap between cash outflow (payments to your supplier, employees, duties etc.) and cash inflow (receipts from your customers), the higher the risk it possesses to the business. These situations persist in every business and to smoothly manage such situations, you need cash flow management. In simple words, cash flow management largely implies managing frequency of payments and a whole lot of activities to encourage your customers to pay as fast as possible. Cash flow management involves a process of preparing cash flow statement, monitoring, analysing and optimizing such that business has enough cash cushion to run their business. In this article’ Tips to Efficient Cash Flow Management’, we are sharing you some of the best ways to manage optimum cash flow in your business. Here are 6 quick tips to manage your cash flow efficiently. Faster realisation of accounts receivables Acco...
Post a Comment
Read more