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Purpose of Financial Statements Essay Example

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Purpose of Financial Statements

Purpose of Financial Statements. This paper illustrates that a balance sheet can be briefly described to be a summarized statement depicting the net worth of a business. It provides the investors and other stakeholder’s information regarding the value of an organization, the assets possessed by it, the debt-equity structure and the manner in which the firm pays off their current liabilities from current assets. Stakeholders rely upon the information procured from the balance sheet to predict the manner in which a firm finances their financial operations. Apart from providing valuable information to the stakeholders, managers also use the balance sheet to assess when to invest in fixed assets and whether purchasing new types of assets or making investments would improve the financial position of the firm.

The balance sheet is also used by organizations to determine the risk levels. It is generally presumed that if the debt value is high, it induces greater risks within the firm. However, highly geared organizations also gain leverage advantages which may result in higher profitability depending on the structure of the organization. In general, most investors use the balance sheet to gain information relating to solvency, productivity, and asset conversion into capital. Broadly, the balance sheet provides information in relation to the financial statements of a business at a given point in time. It is essential for organizations to develop financial statements in a manner such that they can easily be understood and interpreted by stakeholders. Additionally, it is essential that the financial statements are prepared following all the instructions established by the regulatory authorities. Disclosure of vital information, truthfulness and fair means of presentation of information are vital aspects which managers must bear in mind while preparing financial statements. Hence, accountants involved in the process of preparing financial statements must possess the sound knowledge of the principles of accounting. Purpose of Financial Statements.



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preview essay on Purpose of Financial Statements
  • Pages: 11 (2750 words)
  • Document Type: Essay
  • Subject: Business
  • Level: Undergraduate
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