Name: Kubra Wafai Roll no: 08 MBA 1st semester

IMPORTANCE OF FINANCIAL STATEMENTS

Dated: 26.09.2011

FINANCIAL STATEMENT:

A financial statement is a written report which quantitatively describes the financial health of a company. This includes an incomes statement and a balance sheet and often also includes a cash flow statement. Financial statements are usually compiled on a quarterly and annual basis.

Some common financial statements are:

(1)Income statement (also called profit & lossaccount), which shows how the net income of the firm is arrived at over a stated period. (2) Balance sheet or the position statement, which shows firm's assets, liabilities, and net worth on a stated date. (3) Cash flow statement;these statements express a business's results or plans in terms of cash in and out of the business without adjusting for accrued revenues and expenses. (4) Fund flow statement;A fund flow statement shows a company's inflows and outflows of funds.

IMPORTANCE OF FINANCIAL STATEMENTS:

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements are intended to be understandable by readers who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently. Financial statements may be used for different purposes: 1. Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysisis then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders. 2) Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. 3) Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.

4) Cash flow statementshows exactly where the money goes - how it was made, where it was made, and most importantly, how was it spent.These calculations are then used to find the totalincrease (or decrease) in cash and investments. 5) A balance sheet sums up a company's assets, liabilities, and value at a certain point in time. Stake holders look to the balance sheet to determine a company's value based on what the company owns and what they owe to external sources. 6) The government needs financial statements to determine the tax charge on the government or organization. 7) Managers of businesses are benefited most from the use of financial statements, especially those who are good at understanding and analysing these statements. Managers are able to not only discover problems and find corrective actions needed through financial statements but they are also able to make projections of these statements that act as goals and standards for upcoming periods. They are then able to assess performances against these projections at the end of the accounting period.

8) Analysts, brokers, rating agencies and money managers look into these before making recommendations. Corporate raiders, competitors and potential competitors attempt to get these before plunging into a business.