Functions and Importance of Financial Statements
Functions and Importance of financial statements.
The following are some of the functions and importance of financial statements.
1. Importance of Financial Statements to Management: Management needs the financial statements for proper execution of managerial functions. If there is a correct and reliable information, the management can plan properly and perform the functions of operation and control very easily. The financial statements guide the management for effective use of capital employed and determine the level of credit obtained from the banks and financial-institutions.
The well drawn and properly constructed financial statements helps for effective policy formulation. Moreover, the management may examine and analyze the net results of different activities and the efficiency of employees concerned with those activities. The expansion activities of the business concern are determined on the basis of financial position and strength of the company.
2. Importance of Financial Statements to Government: The financial statements are highly useful to assess the tax liability of the business concern. The economic condition of a nation is identified by collecting such financial statements from various industrial sector. Both state and central government can find out whether the business concern is following rules and regulations or not. These statements provide a basis for framing new laws and amending the existing laws for regulating the business.
3. Importance of Financial Statements to Banker: The bankers can find out the ability of the business to meet its obligations, short term and long term solvency, credit worthiness and earning capacity. Besides, the bankers make comprehensive analysis of customers’ policies and plans. The extent of loan can be easily fixed by the banker on analyzing the financial statements.
4. Importance of Financial Statements to trade Association: It provides service to its members i.e. business concern. The extent of service and types of services are determined on the basis of information contained in financial statements. They may develop standard ratios and design uniform system of accounts.
5. Importance of Financial Statements to trade Suppliers: The sales volume of the trade suppliers are increased if the financial statements are properly analyzed and assess the financial position of the customers i.e. business concern. A customer is faithful and regular in payment of trade credit if his financial position is sound. The use of financial statements is very imperative since these statements can convey the delay in payment or regularity in payment and can suggest about customer’s ability to make the payment in future.
6. Importance of Financial Statements to Stock Exchange: The shares and debentures of a company are traded in the stock exchanges. The value of shares and debentures are determined on the basis of financial position and credit worthiness of the company. The financial statements are giving correct information to fix the price for shares and debentures.
7. Importance of Financial Statements to Investors: Both present and prospective investors are reading the contents of financial statements. They assess the financial position of the company from a different angle. Long term solvency, earning capacity, prospects for growth, utilization of funds, sources of funds and managerial ability are identified from the financial statements.
If the investor happens to be debenture holder, he/she studies the financial statements in such a manner whether the company is able to redeem the debentures at the date of redemption. A shareholder considers the liquidity of the company but the debenture holder considers the earning capacity of the company.