What Are The Importance Of Financial Statement

A financial statement is a formal record of the financial activities and position of a business, person, or other entity. Financial statement as communications medium provides a valuable summary of the entities economic history. It is useful to establish the performance as well as the future potential of the entity. Relevant financial information is presented in a structured manner and in a form easy to understand.

While there are some differences between nonprofit and for-profit entities, all businesses typically prepare these three most common financial statements – the balance sheet, the income statement, and the cash-flow statement. These documents are prepared according to generally accepted accounting principles and presented in a standardized

• Shareholders use Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their analysis.

• Prospective Investors need Financial Statements to assess the viability of investing in a company. Investors may predict future dividends based on the profits disclosed in the Financial Statements. Furthermore, risks associated with the investment may be gauged from the Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore, Financial Statements provide a basis for the investment decisions of potential investors.

• Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a loan or credit to a business. Financial institutions assess the financial health of a business to determine the probability of a bad loan. Any decision to lend must be supported by a sufficient asset base and

In that context, we can describe financial statement analysis as the process where we convert data from financial statements into usable information for business quality measurement by different analytical techniques, which is very important in the process of rational management. Therefore, to know the current level of business quality is very significant in the context of future business management, since we try to ensure company’s development and existence on the market. Financial statement analysis comes before the management process that is before the process of planning which is the component of the management process. Planning is very important for good management. Good financial plan has to consider all company’s strength and weaknesses. The task of financial statement analysis is to recognize good characteristics of the company so that we could use the most of those advantages, but also to recognize company’s weaknesses in order to take corrective actions. Because of that, we can say that management of the company is the most significant user of financial statement analysis. In the process of financial statements analysis it is possible to use the whole range of different instruments and procedures. First of all, it considers comparative financial statements and the horizontal analysis procedure together with structural