Financial statements are prepared by a company at the end of the year to ascertain the financial position and profitability of the business and to convey the same to the owners and other stakeholders for their understanding. The primary objective of preparing the financial statements is to help in better decision making.
Some of the objectives of financial statements are:
- To provide information about economic resources and obligations of a business: Unlike owners/ management of the company, other stakeholders like investors, creditors, bankers, tax authorities, government etc do not have the authority and direct access to the financial information of the company. The financial statements therefore provide them with reliable and adequate knowledge about the earning and obligations of the company.
- To ascertain earning capacity of the concern: The financial statements makes it easier to evaluate the earning potential of the company. This can be easily compared with performances of other companies and necessary action can thus be taken.
- Tracking of cash flows: The investors who invest the amount in the business or creditors to whom the company owes funds are interested in knowing the cash flow position of the company. This helps them to evaluate profitability/ credit worthiness of the concern and the security of their funds. On the basis of this information they can decide whether to continue or discontinue the investment.
- Effectiveness of management: Another objective of financial statements is to figure out whether the management of the company is working at its full capacity towards the betterment of the business. It can be identified with the results that the resources available are utilised effectively and efficiently.
- Information about activities of business affecting the society: It is rightly said that a business cannot exist at the cost of the social environment. The management of the company is accountable to the society at large as they utilise their resources. Therefore, it is the responsibility of the company to report those activities which affect the society. It is because of this reason a company is liable to contribute some amount towards the corporate social responsibility (CSR).
- Disclosure requirements: The financial statements are accompanied with notes to accounts which contain several disclosures regarding the accounting policies and procedures followed by the company. It also depicts whether any changes have been made in the accounting concepts so followed during the year due to any specific reason. The changes could be made to comply with any statue of law or for better understanding.
Along with presenting the financial position of the company to the owners and external parties, the financial statements also have a variety of other objectives to serve. They help in pointing out the efficiency of the decisions taken by the management and thereby evaluate their effectiveness.