Frederick Cole Burgess
Importance of Financial Statements
Financial statements are important reports. They show how a business is doing and are very useful internally for a company's stockholders and to its board of directors, its managers and some employees, including labor unions. Externally, they are important to prospective investors, to government agencies responsible for taxing and regulating, to lenders such as banks and credit rating agencies, and to investment analysts and stockbrokers. They are especially useful to managers, investors and creditors.
Firstly, managers of businesses, more than any of the other users, benefit most from the use of ...view middle of the document...
More specifically, investors and creditors need to know where their money went and where it is now. The financial statement of balance sheet addresses such issues by providing detailed information about a company’s asset investments. The balance sheet also lists a company’s outstanding debt and equity components, and so debt and equity investors can better understand their relative positions in a company’s capital mix.
Financial conditions shown in the balance sheet are snapshots of a company’s assets, liabilities and equity at the end of a financial reporting period; they don’t reveal what happened during the period from operations that may have caused changes to financial conditions. Therefore, operating results during the period also concerns investors. The financial statement of income statement reports operating results such as sales, expenses and profits or losses. Using the income statement, investors can both evaluate a company’s past income performance and assess the uncertainty of future cash flows.
A company’s profits reported in the income statement are accounting income and most likely contain certain non-cash elements, providing no direct information on a company’s cash exchange during the period. Moreover, a company also incurs cash inflows and outflows during a period from other non-operating activities, namely investing and financing. To investors, cash from all sources, not just accounting...