Essay on The Purpose of Financial Statements

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The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement.

There are four areas of information, which we can collect from a company's financial statements. They are:

Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.

Ÿ Liquidity - This information comes from
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Ÿ The information should be consistent in its presentation.

Ÿ The information should be up to date.

Ÿ The information should be economically presented. The information should just be what is important. Also since gathering information can be costly, the cost should never be greater than the benefits, which are gain from it.

Ÿ The information should always give a complete picture of the state of the company whether the information is good or bad.

Financial accounting is concerned with reporting information to external and internal users of financial statements. External users are people not involved with the day-to-day running of the company. Internal users are people who are involved. Among the people who use information collected from accounts are:

Ÿ Shareholders (present and potential)

Ÿ Short and long term creditors

Ÿ Authorities

Ÿ Competitors

Ÿ Employees

Ÿ Analysts and

Ÿ Management

Present Shareholders

These are the people who provide the money or capital to finance the company. Shareholder have no say in how the company is run, which means their source of information is all the financial statements Profit and Loss, Balance Sheet and Cash Flow Statement. As well as
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