What is the Purpose of Financial Statements?

August 27, 2015 by Ed Becker

The main purpose of the financial statements is to offer and record information as to the financial position and changes in financial position of a business. Decision makers use this information to further businesses economic growth.

There are many individuals and groups that benefit from the reviewing of financial statements. By sharing the company’s financial statements with management and outside persons it benefits the company in making future financial decisions and goals.

Management uses the financial statements to make required decisions for future growth or changes that will benefit the bottom line. Knowing the financial status and operating cash flows helps with everyday decisions that affect the company’s future.

Shareholders glean information from the financial statements to gauge risk and the stability of their return on investment. Using this information allows them to make personal investment decisions.

Future investors use the financial statements similarly to shareholders but as a means to assess the risk of investing in the company now or in the future. With the financial statements they can predict future dividends using the current profits. It also allows them to predict risk factors based on the information in the financial statements.

Banks/Lenders use the financial statements to assess risk of more lending to the company. Reviewing the financial statements allows them to see credit worthiness and financial health. Most loans need to be supported by assets and equity that will ensure bad debt will not be incurred.

Suppliers use the financial statements similarly to banks and lenders, to assess risk in credit worthiness. Before a supplier opens a line of credit they want to ensure the company has a healthy financial situation and history of on-time debt repayment. This is especially true if the supplier offers specialized items or high ticket items necessary for the company’s success.

Customers are at the other end of the spectrum, they use the financial statements to ensure the company will be a good supplier for them. Reviewing the financial health and stability of the company helps assess a steady supply of necessary products.

Employees may be interested in the company’s financial statements to determine job security and risk, or to assess stability as a prospective employee. If the company is not financially stable it may not be a good option to accept employment with them.

Competitors use the financial statements information to compare with their own to form new strategies to compete for business.

Public persons may assess the company’s financial statements to see what effects it has on the community, the economy and the environment. Social and ecological responsibility is something more consumers are interested in knowing before they buy.

Governments use the financial statements to ensure tax returns are correct and track the economic progress of companies.

Many individuals and groups are interested in financial statements for different reasons, but with similar ultimate goals: to view the financial stability of the company and to see the economic impacts that could affect local communities and economies.