What is the Importance of a Company's Financial Statements?
A company's financial statements provide vital information about its financial health. Financial Statements accurately reflect business performance and financial position of the corporate. Additionally, it helps all stakeholders including management, investors, securities analysts etc. to gauge and take suitable economic decisions by comparing past and current performance and thus predict future performance and growth of the corporate. The knowledge the statements provide offers benchmarks and feedback that help the corporate to make minor adjustments and also determine its overall direction. Financial statements are useful for creating decisions regarding expansion and financing. They also figure into marketing decisions, providing data indicating which aspects of company operations provide the simplest return on investment. An honest deal of the knowledge presented during a financial report is required by law or by an accounting standard. Your company's financial statements are important tools for senior managers to speak past successes also as future expectations. By publishing financial statements, management can communicate with interested outside parties, like investors, the journalists and industry analysts about its accomplishments in running the corporate.
Features of Financial Statements
1. The Financial Statements should be relevant for the aim that they're prepared. Unnecessary and confusing disclosures should be avoided and everyone who is relevant and material should be reported to the general public.
2. They ought to convey full and accurate information about the performance, position, progress and prospects of an enterprise. It’s also important, those that prepare and present the financial statements shouldn't allow their personal prejudices to distort the facts.
3. They ought to be easily comparable with previous statements or those of comparable concerns or industry. Comparability increases the utility of monetary statements.
4. They ought to be prepared during a classified form in order that a far better and meaningful analysis might be made.
5. The financial statements should be prepared and presented at the proper time. Undue delay in their preparation would scale back the importance and utility of those statements.
6. The financial statements must have general acceptability, understanding and accuracy.
7. The financial statements shouldn't be suffering from inconsistencies arising out of private judgment and procedural choices exercised by the accountant.
8. Financial Statements should suit the legal requirements if any, as regards form, contents, and disclosures and methods.
Why do we need financial statements?
1. To Monitor the Financial Conditions of a Corporation
A company’s financial conditions are of serious concern to investors and creditors. As sources of finance for your company operations, investors and creditors believe financial reports to measure conditions for the security, liquidity and profitability of their investments. More specifically, investors and creditors can get to know where their money went and where it's now.
2. To Make Investments Plans
Your financial record addresses such issues by providing detailed information about the company’s asset investments. The record also lists a company’s outstanding debt and equity components, then debt and equity investors can better understand their relative positions during a company’s capital mix.
3. To Report on Operating Result
Financial conditions shown on the record are snapshots of a company’s assets, liabilities and equity at the top of a financial reporting period; they don’t reveal what happened during the amount from operations which will have caused changes to financial conditions. Therefore, operating results during the amount also concerns investors. The budget of earnings report reports operating results like sales, expenses and profits or losses. Using the earnings report, investors can both evaluate a company’s past income performance and assess the uncertainty of cash flow management.
4. To streamline the cashflow between Corporates
The importance of the income statement is that it shows the exchange of money between corporations and therefore the outside world during a period, then investors can know if the corporate has enough cash to buy expenses and asset purchases. The corporate profits and turnover reported within the earnings report are often difficult to interpret and presumably contain certain non-cash elements, providing no direct information on a company’s cash exchange during the amount. Moreover, a corporation incurs cash inflows and outflows during a period from other non-operating activities, namely investing and financing. To investors, cash from all sources, it is not just accounting income from operations, is what pays back their investments.
5. To analyse the Statement of Shareholders’ Equity
The statement of shareholders’ equity is particularly important to equity investors because it shows the changes in various equity components, including retained earnings, during a period. The quantity of shareholders’ equity may be a company’s total assets minus its total liabilities, representing the company’s net worth. A gentle growth during a company’s shareholders’ equity by way of accelerating retained earnings, as against expanding shareholder base, which means the build-up of investment returns for current equity shareholders.
Why choose CDA?
Your needs grow when your company grows and you need more services to comply with the laws of the land. CDA is a dedicated Accounting & Bookkeeping Service Firm with more resources to meet your needs.
Also read, Why your Business Needs Financial Restructuring?
CDA offers a wide range of Business Services in Dubai and UAE, like VAT Consultancy Services, CFO Services, Due diligence services and many more related to your business. If you have any queries, feel free to contact us. Our experts are at the receiving end to attend your call and answer your queries. CDA offers a one-hour free consultation.
