Why we need financial statement? – by Brenda
What is a financial statement?
Financial statement is a collection of documents and reports which accounts for the financial status and activities of an individual or a business. It shows where the money is from, where it went and where it is now.
The financial statement consists of:
- Balance sheet
– Shows the company’s financial status at the end of specified date and the company’s assets, liabilities and shareholder’s equity.
- Income statement
– Shows the revenues, expenses and profits of a company over a specific time period.
- Cash-flow statement
– Shows the company’s cash inflow and outflow during a period of time.
The purpose
The general purpose of the entire set of financial statement is:
- To determine the ability of a business to generate cash, and business transactions such as the sources and expenses.
- To determine the business’s capability to pay back debts.
- To determine the trends in the finance results of company operations.
- To evaluate financial ratios from the statements to understand the business performance.
The financial statement provides important details of a company’s financial position, profitability and activities (involving its finance, operation, investment). The shareholders, investors, banks or vendors use it to analyse a company for the following purpose:
- Investors
– To decide whether to invest, and to determine the price per share to invest.
- Lenders
– To determine whether to loan to a business, or restrict the amount already loaned.
- Government entities
– To tax the business.
- Acquirer
– To determine the price to offer to buy the business.
