What is the purpose of financial statements?


Quick Answer

According to Investopedia, financial statements are used to ensure accurate and honest accounting for businesses and individuals. Accounting-Simplified.com points out that managers, shareholders, investors, financial institutions, governments, a company's competitors and the general public all have different interests in and uses for a company's financial statements.

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What is the purpose of financial statements?
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Full Answer

The four main types of financial statements include income statements, balance sheets, statements of retained earnings and cash flow statements, according to Accounting-Simplified.com. The income statement is a financial statement in which companies indicate the number of sales and expenses incurred over a period. Balance sheets provide information about the company's asset, liability and equity accounts as of the date stated on the report. Cash flow statements focus on the types of activities that create and use cash, and statements of retained earnings provide information about the movement in owners' equity over time.

According to Accounting-Simplified.com, financial statements play an important role in managing information about the financial performance of an enterprise. Managers, shareholders, financial institutions and prospective investors use financial statements to make critical business decisions and assess the profitability of the company. Competitors use the financial statements of rival companies to compare their performance and to develop strategies to improve their competitiveness. The general public uses a company's financial statements to monitor the effects of the business on the economy, environment and the local community. Governments also use a company's financial statements to keep track of tax declared in the tax returns and the economic performance of businesses in a particular sector.

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