Purposes of Financial Statements:

The main Purpose of Financial Statements is to provide information of entity including, but not limited to, Financial Performance, Financial Position, Profit or Loss, Nature of Business, Assets, Liabilities, and Equity

Such information is very important for users to assess the entity’ status to support their decision making. 

Before explaining about the common purpose of Financial Statement, we would like to mention three elements of financial statements. They are Statement of Financial Position, Income Statement, and Statement of Cash Flow.

You may interest by checking here => Three elements of financial statements.

The Financial Statements contain much important information of the entity in term of financial perspective. That information included:

The clip below also explain you some about the purpose of using Financial Statements.

1) Assets

purposes of financial Statements
purposes of financial Statements
  • Property Plant and Equipment
  • Inventories
  • Receivables
  • Cash and Others cash equivalence
  • Others Assets

2) Liabilities

  • Accrual
  • Salaries Payable
  • Account Payable
  • Long term and short term debt
  • Others Liabilities

3) Equity

  • Ordinary Shares
  • Shared Values
  • Retain Earning

4) Income

  • Main income of the entity ( Sales of Goods or Services)
  • Others sources of incomes

5) Expenses

  • Cost of Goods Sold
  • Operating expenses listed by components
  • Others expenses

The above are the important financial information of the entity in financial perspective. That information could be used by different people or group of people for different purposes.

Here are the four Purposes of Financial Statements we mention above

To help Owners and Managers of the Entities

This is probably the first Purposes of Financial Statements. Why is it important for the owner and manager? Well, their purpose is not different from others.

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Financial Statements are quite important for this group of people. The statement provides all information related to the financial perspective of the entity; therefore, the owner and management could use that information for performance evaluations and performance appraisal.

Financial Statements analysis technique are used to figure out those performances. The statements could be reporting on the specific period; for example, quarterly or annually.

To help Entities’ Employees

Another Purpose of Financial Statements is to help the employee. Why the financial statements is quite an importance for employees?

Well, there are many purposes, but the most important is to analyst whether the entity could sustainably make the payment on their salary or not, and to identify whether the entity could secure their job.

To help Prospective Investors

Well, this quite common. The prospective investors or future shareholders of the entity especially in financial market, they always use the financial statements of the entity to evaluate the financial viability and return on investment acceptability of the entity.

Investors also use the statement in the purpose of assessing the stability of the entity for future growth. This could be done through financial statements analysis technique.

To help Financial Institutions

Not only shareholders and return on investments are the important source of finance of the entity, but Financial Institutions are also the major sources.

The entity normal borrow the loans from financial institutions to support its operations or projects. Those Financial Institutions including banks and other lending companies.

Before provided loans, those companies, if loans are large enough, obtain the financial statements of the companies and in the purpose to assess whether the borrowing company could be able to repay its loans principle as well as interest or not.

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In most case, profitability, cash flow, and secure assets are the main factor that they always review and assess.

In most case, profitability, cash flow, and secure assets are the main factor that they always review and assess.

Conclusion:

There are many other Purposes of Financial Statements that we might exclude from the list above. However, we believe that what we list above is the most importance:

  • To help Owners and Managers of the Entities
  • To help Entities’ Employees
  • To help Prospective Investors
  • To help Financial Institutions