The Main Function Of Financial Statements

Published Date: 02 Nov 2017

The main function of financial statements is to provide information about the financial position, performance, and variations in the financial position of a particular individual or a business enterprise. The financial statements of any business entity should be relevant, understandable, reliable, and comparable so that the non-professional users can read them as well as the professional ones. Financial statement that is understandable, reliable and comparable enables the business entity’s stakeholders to at least get to know about their particular interested business and its economic activities. This does not just make our life easier in understanding a particular business entity but this helps investors to be more considerate of their investment to a particular company.

The financial statements are not just providing information to the investors only but the stakeholders which the investors are included as a stakeholder, too. Let’s define more about what actually a stakeholder is. A stakeholder is a person or group of people who can affect or be affected by a given financial project. For example, an existing and potential shareholders or creditors, employees, managers and public can be a stakeholder. [2] A stakeholder may be involved in a project’s work actively such as the manager. They will be affected by either the financial project’s outcome or in a position to affect the financial project to be either gain or lose. Stakeholders can be an internal part of a project’s organization, or external, such as customers, creditors, unions, or members of a community. To define stakeholders in detail, stakeholders are the customer, the project manager, a team, sponsor, suppliers of material or other resource, employees, unions, city, community, creditors, or other geographic region and professional organizations. Besides that, any individual or group impacted by the project or group in a position to either support or reject a particular project are also considered as stakeholders.

So why is it a financial statement important to the stakeholders? First and foremost, financial statement is important to managers. As a business manager, the role of a business manager especially those who are good at understanding and analyzing these statements will helps a lot in managing the whole financial statements. They benefit most from the use of financial statements because they are able to not only discover problems and find corrective actions needed through financial statements but they are also able to make projections of these statements that act as goals and standards for upcoming periods. They are then able to access performances against these projections at the end of the accounting period. The Profit and Loss Accounts or abbreviated as P&L account summarize the incomes and expenses of a company in a particular time given. It also includes accruals too, which are incomes that will be identified only after the particular Profit and Loss Account statement was completed. Therefore, manager can make the best decision to improve a business of a company through the financial statement.

Besides managers, the financial statement is also important to the shareholders. The 1948 Companies Act has stated that a company should provide a statement or presentation known as Profit and Loss Account to shareholders. [3] Financial statements are used to help them to make decision whether retent or dispose their shareholdings or stocks. This is because financial statement is the only way for shareholders to gauge the overall condition of a company. [4] The statements will keep the investors up-to-date and allow them to investment decision wisely. Therefore, financial statements are the best way for investors to resolve their curiosity towards their investment. A reasonable answer of why the investors care so much about the financial statements is to investigate their investment’s revenue. Each corporation has a dividend structure that pays shareholders a certain amount of profits. This is because dividend given by a company are often based on revenues and income, so shareholders can get a good idea of how much they can expect to profit through the dividends given. Financial statements can show the profits of a company but they can also display the increasing debt, risky investments and misuse of cash that can make shareholders worry and decide to sell their stock.

In addition, financial statement is important to the suppliers because it enable them to understand the situation in company. Accounting statements allow them to evaluate the state of the financial of a company. Suppliers rely on financial statements to evaluate the presence of the markets. It’s an important step because they have to investigate the client’s condition before dealing with them, especially those they intend to deal with on a long-term basis. If a financial statement shows unstableness of a company, supplier will have to reduce the goods supply. If the financial statement appears to have high revenues and income, the suppliers will tend to promote more and increase the goods supply [5] . So, the trust is important between the company and supplier through the financial statement because they work mutually to each other to profit each other. According to the statement, suppliers can promote the new products to a particular company to widen their market for a product, too.

In a conclusion, there are various types of financial statements uses and purposes which measure different financial aspects of particular company. They can be used for both internal and external uses. Financial statements are useful because they show the financial condition of a company at a specific given period. It not just will affect the decision of the investor but it will also affect a running of a business.