How Financial Statements Are Helpful?
How financial statements such as Income Statement, Statement of owner’s equity, balance sheet, and statement of cash flows are helpful to business owners, employees, and investors?
What’s a Financial Statement?
Financial Statements are written and formal records of all relevant business activities and financial information, including assets, liabilities, equities, incomes, and expenses of a business, person, or entity over a period of time (01). Furthermore, these records are presented in an organized manner to allow easy understanding. Therefore, they must be reliable and updated from time to time.
There are four basic types of financial statements (02), which, when combined, give more detailed information on the performance of a business. In detail:
What are the 4 types of financial statements?
- Balance Sheet: This type of financial statement shows a company’s worth in terms of assets and liabilities coupled with the capital invested in the company by its shareholders (03).
- Income Statement: This is also known as the profit and loss statement; it focuses on the revenues and expenses of a business or an individual during a period of business activity (04).
- Cash Flow Statement: It’s a financial statement that summarizes the amount of cash generated and spent by a company over a while (05). This statement is divided into three sections to list cash flow from the company’s operations, investments, and financing activities.
- Statement of Owner’s Equity: This document provides the changes in capital account considering withdrawals, contributions, and net profit or loss. It’s a report of events that led to the increase or decrease in the stockholder’s equity over a while (06).
importance of financial statements
As an individual with a means of income and expenses, a knowledge of your financial status is as important as the next meal, you plan to eat. As a business, a form of record is important to keep track of how your business is or has been performing over a while. All the alerts and emails that you receive from your bank about charges for electricity, cable TVs as well as Netflix are a form of financial statement.
Since the objective of a financial statement is to provide information about the financial position and performances of a business, it is important to know how this information will be of use to the following (07).
How are financial statements important to business owners?
The importance of financial statements to business owners cannot be overemphasized. It shows them how well their business has performed during a period, how much profit was made, and how much they have lost. They will have access to reports and records that show what business decisions have had positive or negative impacts on their businesses. It also provides them with information that would enable them to make informed decisions regarding the future of their businesses.
How are financial statements important to employees?
An employee can use the financial statements to access the financial state of their company and the impact on their wages and salary as well as the security of their job in the company. It also helps them make an informed long-term decision on how long they should remain at a company.
How are financial statements important to investors?
Investors need the financial statement of a company to access the level of risk involved in investing in a company. Financial statements are important to investors because they can provide a lot of information about a company’s income, expenses, and whether or not its financial goals are met. It also shows the investor how the company is faring in comparison to its competitors.
Check the following reference articles to learn more about how financial statements are helpful.
- Financial statement. (2020). Retrieved 16 November 2020. URL
- Ali, A. (2020). What Are Financial Statements | 4 Types Of Financial Statements | Explanation | Examples. Retrieved 16 November 2020. URL
- Murphy, C. (2020). How to Interpret Financial Statements. Retrieved 16 November 2020, URL
- Murphy, C. (2020). How to Interpret Financial Statements. Retrieved 16 November 2020, URL
- Murphy, C. (2020). How to Interpret Financial Statements. Retrieved 16 November 2020, URL
- 06. Ali, A. (2020). What Are Financial Statements | 4 Types Of Financial Statements | Explanation | Examples. Retrieved 16 November 2020, URL
- 07. Ali, A. (2020). 11 Objectives Of Accounting | Simplified. Retrieved 16 November 2020, URL
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