The Importance of Financial Statements

999 Words4 Pages
Introduction For any business keen to remain relevant in an increasingly competitive marketplace, the importance of financial statements cannot be overstated. Basically, financial statements are utilized by various stakeholders for a wide range of reasons. In this text, I identify four basic financial statements and briefly describe the purpose of each identified statement. Further, I discuss how both external and internal users utilize each statement. A Discussion of the Main Financial Statements As I have already pointed out in the introductory section, financial statements are critical for the smooth operation of any business. Indeed, we have all heard financial analysts insisting on the need for investors to 'do their homework' or have a look at a given entity's financial statements prior to investing. In basic terms, financial statements strive to capture various aspects of an entity's financial activities. Four of the basic financial statements I highlight in this case include the balance sheet or statement of financial position (SOFP), the statement of owner's equity, the income statement and the cash flow statement. The Statement of Financial Position (SOFP)/Balance Sheet According to Hey-Cunningham (2007), "the monitoring of assets, liabilities and equity is an important aspect of managing an enterprise." The statement of financial position is used to report these items. This statement as its name suggests reports an entity's financial position.
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