Financial Statement : Objectives of Financial Statement

In every organization, financial statements require understanding the current and previous financial status of the organization. Over some time, organizations need to know profit and loss, assets and liabilities through financial statements. It helps to understand the current financial scenario of an organization and provide solutions to deal with maintaining the organization’s stability.

In any organization in the accounting process, financial statements provide information regarding the organization’s financial performance. These reports reflect the business status and help to make decisions for the future perspective. The higher management includes or excludes stakeholders, investors, regulatory bodies, creditors, and tax authorities in the base of financial statements. 

Financial statements depend on four parameters:

1. Balance sheet

2. Profit and Loss statement

3. Cash Flow statement

4. Income statement

Objectives of Financial Statements

In every organization, financial statements reflect the day-to-day business record. It helps to figure out the cash flow in the business and understand the value of fixed assets and trade receivables. In terms of accountancy, the valuation of the market price is important to understand.

Depending on the price, organizations need to prepare their decisions. It helps to make good profit and loss statements for the organization to understand the market value and its position. In an organization, it is important to understand and support personal opinions. It helps the organization to run in the long term by maintaining accurate financial statements. 

The core objectives of financial statements are discussed below:

Firstly, Financial statements are important for some parties in the organization: owners, stock exchange, management, creditors, employees, government, investors, and consumers. 

Owners need to know the organization’s financial position through financial statements to decide to extend or make any kind of changes for the organization. It ensures the betterment of the company in the future perspective.

Financial statements help to understand whether new methods will be required or not. It reflects the true picture of the organization’s finances. Hence, it is important to understand the profit and losses. As an owner of an organization, he or she must focus on the profit or losses to retain or maintain the company’s sustainability and make it better in the future. 

Management needs to know the financial stability of the organization to make decisions on the particular situation. At the end of the day, they have to be answerable in front of the owner for any kind of business decisions or uncertainties. Financial statements provide the organization’s current status that needs to be understood for the management to take steps for every problem. 

Creditors need to know the financial position of the organization to provide loans and other financial support. Creditors provide loans and other support only when the organization is financially strong or has a good reputation in the market for the last 5 to 10 years. If the organization’s stability decreases, then the creditors will take backstep to help the organization in financial terms. In the organization, when liabilities are less than the Assets, creditors get confidence to provide the loan of financial support to the organization for a long-term basis. 

Employees need to understand the different financial statuses of the organization. It is important for the employee to understand as they are the company’s pillars that make an organization successful. In the market, they are the first contact person or face of the organization to represent a positive value of the organization’s current business. 

Governments need to understand the financial position of the organization to put some rules and regulations on it or change taxation parameters accordingly. 

Consumers need to focus on the organization’s financial status to purchase the product from the company. Consumers are the ultimate stakeholders for any organization, so it’s important to maintain the organization’s financial stability. The financial statements are the only key factor to regulate the organization’s financial stability in a good manner. 

Stock Exchange depends on the financial statement of the organization. Depending on that, the stock exchange can change the rates of the stocks or shares accordingly. Every day in the national and global business, the variation of stocks changes depending on the financial terms of an organization. The decrement or increment of the stocks depends on the financial position of the company. The financial position should reflect on the financial statements in profit & loss or the balance sheet. 

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Secondly, financial statements reflect the assets and liabilities of the organization. The usage of assets helps the organization to maintain the balance in the financial situation. For that purpose, on a regular basis, financial statements should be maintained by your organization. 

It helps to understand and keep in the knowledge of the daily business. To reduce the liability, the organization should focus on profit generation through the current market scenario. A financial statement helps to keep the focus on the key positions that help to make better decisions. This information reflects the future position of the company and maintains the capability of the organization. 

Thirdly, one objective to maintain financial statements is to maintain the social impact in the business. In an organization, external and internal factors can change the financial growth of the business. In case of internal financial parameters involves analyzing, reporting, and compiling financial information within the organization. It is day-to-day work for the organization and maintains the data in the system. 

The case of external financial parameters involves distributing the information to potential stakeholders, shareholders, creditors, and investors. They take the financial report of the organization to maintain the external financial factors for the organization. In the monthly, quarterly, or yearly report, we can see the differences of every internal or external parameter.

Internal and external parameters are interlinked to each other. So, increment or decrement of each parameter changes another parameter change. As a result, the financial terms change within the organization. It reflects on the financial statements like balance sheet or profit & loss statement. 

Fourthly, Financial statements help to maintain the accounting policies for the organization. The accounting policies depend on the financial methods, procedures, and measurement system. These parameters have been changed depending on the financial position of the organization.

Accounting policies need to understand the stakeholder’s scope of the business. This information you can get from financial statements helps you know and set organization policies in different aspects. It helps to make the comparison between two rival organizations within the market and consider the facts to put values for the organization in upcoming days. 

By using the LIFO or FIFO inventory method, we can calculate the higher value of goods in the current scenario for the organization. It also helps to maintain its stocks and competitive market price in the national and international market. The financial statements help to regulate the income source for the organization. It changes the accounting policies for better growth of the organization.

The accounting policies participate in goodwill, research and development costs, and inventory valuation. Once the financial position of the organization changes, all the parameters change accordingly. As a result, the rules and regulations of the accounting policies will change. This information is kept on the financial statements as in profit and loss and balance sheet. 

Fifthly, For any organization, resources are important to maintaining the cash flow within the organization. The business revolves around resources. It depends on cash reserves, delivery mechanism, transport system, warehouse for inventory management policies, production capacity and quality, labor hours, and other parameters. All this information comes from financial statements. It helps to understand the potential factors of the current business and the requirement of changes or acquisitions. 

Resources help shareholders, investors, and stakeholders to make financial decisions for an organization. This financial information helps increase the earning capacity of the organization. At the management level, it helps to maintain the assets and liabilities to maintain the earning capacity in a productive entity. For that reason, the records of financials have to be put down, and it reflects through financial statements. The proper utilization of resources and assets to reduce the liabilities. 

Conclusion

In any organization, it is important to maintain the understanding of each financial and non-financial parameter. A proper financial statement requirement is important to prepare rules and regulations, accounting policies, standardize framework, and maintain corporate laws.

The various probabilities and procedures help to make the proper decision for the organization. It provides proper support to maintain the financial growth for the organization and achieve the objectives on a long-term basis. Financial statements like balance sheets, profit, and loss statements, and income statements should be maintained daily.

The analysis of this financial statement is required to maintain the sustainability of the organization. Yearly, financial statements provide the ratio between gross profit and net profit. It helps to compare between 2 to 3 years for the organization to check productivity. As a result, management can make better decisions for the organization’s future purpose and increase the cash flow within the market.