ACCOUNTING FINANCIAL STATEMENTS - the purpose of financial statements

ACCOUNTING FINANCIAL STATEMENTS - the purpose of financial statements


ACCOUNTING FINANCIAL STATEMENTS - the purpose of financial statements - You have got to know the purpose of financial statements, purpose of financial statements analysis,
uses of financial statement, how are financial statements useful to managers and employees, purpose of statement of financial position, purpose of financial reporting,
importance of financial statements. These are the reasons for this article.


In our first article on this topic, we defined financial statement to include Balance Sheet, Income Statement, Statement of Changes in Equity and Cash Flow Statement, but went on discussing only Balance Sheet. We still promise that in our subsequent publications we shall discuss each of these elements of Financial statements one after the other. Meanwhile, we want to discuss why Financial statement is needed, under the topic, What is the purpose of Financial Statements.


ACCOUNTING FINANCIAL STATEMENTS - the purpose of financial statements


ACCOUNTING FINANCIAL STATEMENTS - the purpose of financial statements


At this point this is necessary for our readers to know why they should read everything about Financial Statements. We present these articles as part of our roles in educating our numerous clients, other business proprietors, and the public. We welcome enquiries for further information and especially on what we can do to help our client's businesses grow. We also have in mind  enriching the knowledge of various students who will read these articles.

The general purpose of the financial statements is to provide information about the results of operations, financial position, and cash flows of an organisation. This information is used by the readers of financial statements to make economic decisions regarding the allocation and reallocation of resources.

The purpose of financial Statement can be viewed from the content of the various elements of Financial Statement.

Income Statement:


- informs the reader about the ability of a business to generate a profit.

- it reveals the volume of sales,

- It reveals the nature of the various types of expenses,

- it shows the classification or aggregation of expense . 

- When reviewed over multiple time periods, it can be used to analyse trends in the results of company operations.


ACCOUNTING FINANCIAL STATEMENTS - the purpose of financial statements

Balance Sheet:


- informs the reader about the current status of the business as of the date listed on the balance sheet.

- This information is used to estimate the entity’s liquidity,

- The information also reveals the funding activities of the entity,

- It shows also the debt position of an entity,

- It is the basis for a number of liquidity ratios.


Statement of Cash flow:


- show the nature of cash receipts


- and disbursements, by a variety of categories. 

- shows how changes in balance sheet accounts and income affect cash and cash equivalents, 

- it breaks the analysis down to operating, investing and financing activities. 

- The statement captures both the current operating results and the accompanying changes in the balance sheet.

- As an analytical tool, it is useful in determining the short-term viability of a company, particularly its ability to pay bills.


ACCOUNTING FINANCIAL STATEMENTS - the purpose of financial statements


Statement of changes in Shareholders equity:


 Explains changes in

- a company's Share Capital,

- accumulated reserves

- retained earnings over the reporting period, and

- It breaks down changes in the owners' interest in the organisation,


- in the application of retained profit or surplus from one accounting period to the next.

- it typically reveals profits or losses from operations, dividends paid, issue or redemption of shares, revaluation reserve and any other items charged or credited to accumulated income,

- it also includes the Non-Controlling Interest attributable to other individuals and entities.

There is no doubt that the purpose of Financial Statements as explained above are very necessary for company performance evaluations. Such regular evaluations are necessary for businesses to define where they were, where they are , where they should be, and where they would like to be in future. Without Financial Statements, these may not be possible to achieve.

ACCOUNTING FINANCIAL STATEMENTS - the purpose of financial statements

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