what are the objectives (purpose) of financial statements?

 Here, we will look into the core objectives or purpose of preparing financial statements. Let's dive right into it. Let us understand it in simple terms.

Financial statements are the reports and statements issued by management to the users of financial information such as creditors, investors, shareholders, government, public to communicate the financial performance, position, and cash flow of the business organisation. The main objective of financial statements is to provide information about the financial performance, position, and cash flow of the enterprise that would be helpful for users to make economic decisions.

  Financial statements include income statement, statement of changes in shareholders' equity, balance sheet, cash flow statement and Notes (disclosures) to financial statements. Generally, financial statements are prepared at the end of the financial year to disclose the financial performance and position.

 An income statement also called a profit and loss statement, is prepared to disclose the organisation's financial performance. A statement of equity changes or changes in shareholders' equity is ready to know the change in equity balance at the end of the financial year. The balance sheet is prepared to disclose the financial position as on a particular date. A cash flow statement is ready to know the cash and cash equivalents balance change at the end of the financial year.

What are the main objectives or purpose of Financial Statements?

The main objectives or purpose behind preparing financial statements are

1. Financial Performance

The main objective of financial statements is to provide information about the financial performance, position, and cash flow of the enterprise that would be helpful for users to make economic decisions. Profit and loss account helps to know the financial performance for the year of the company. It shows the profit earned or loss incurred for the year. It shows the sales made, incomes earned, purchases made, and expenses incurred for the year. 

2. Financial Position

A balance sheet or position statement helps to depict the financial position of a company. In other words, it gives a picture of the assets and liabilities of a business enterprise. It helps to know the Net assets, Net worth, capital structure, short-term and long-term liabilities, Reserves & surplus balance, other investments made, cash and bank balance available with the company

3. Changes in Cash flow 

A cash flow statement is one of the financial statements prepared to show the changes in cash and cash equivalents at the end of the year. It shows the cash inflows and cash outflows from operating activities, investing activities, and financing activities at the year-end. It helps in cash flow analysis and management of cash and cash equivalents effectively

4. Useful Decision making

The financial statements help investors to decide whether to invest in the company or not, based on the available financial information. It helps creditors, and lenders to decide whether to give loans, advances, goods and services on credit. It also helps management to make useful decisions on the basis of available information.

5. Conduct of Audit

These statements help the Auditor to conduct the audit in a smooth manner. An audit is the independent examination of financial information available in the financial statements with a view to express an opinion on financial statements.

6. Levy Taxes by Government

The audited financial statements help the Government to levy and impose taxes. These statements become reliable if they contain complete information without errors & fraud. The Government uses audited financial statements to levy taxes as they are reliable and trustworthy.

7. Assist Top Management

These statements help the top management predict the earning potential and available resources of the company. This would help the top management to devise expansion and growth strategies. This would be helpful to leverage the opportunities and expand the business of the company.

Conclusion

The main objective or purpose of financial statements is to provide information about the financial performance, position, and cash flow of the enterprise that would be helpful for users to make economic decisions. Profit and loss account helps to know the financial performance for the year of the company. Also, feel free to share this useful content on social media, and leave a comment as well.