Question

What are the objectives of preparing financial statements? Explain in detail. (need 500-600 words)

Answer 1

Financial shareholders of a company massively rely on its financial statements to know its functioning. They represent the original state of affairs of the company.

The objectives of financial statements:

The primary objectives of financial statements are to perform the right and fair value of the state of affairs of the firm with the aid of its different reports such as The income statement, Balance sheet, Cash flow statement, Funds flow statements.
In brief, the financial statement's objectives are to provide information about the financial condition, performance, and shift in the financial position of a company that is beneficial to a broad range of users in making economic conclusions.

(i) Understanding the Profitability of Business:
Financial statements are needed to determine whether the enterprise is earning sufficient profit and to identify whether the benefits have grown or diminished as compared to the previous year. These statements present an actual state of a company's economic assets and liabilities. They help in predicting the extent of a company's ability to obtain profits. Shareholders and investors can use these data to make their financial conclusions. They aid conclusions about the replacement of fixed assets and the extension of the firm.

(ii) Understanding the Stability of the Business:
Financial statements help to examine the business's situation about the capability of the entity to repay its short and long-term liabilities. These statements portray the effectiveness of a company's administration. How well a company is functioning depends on its profitability, which these statements present. They furnish required information regarding the efficacy or otherwise of the management regarding the precise utilization of the limited sources. It also describes the cash position and the mix of debt and equity accessible with the company.

(iii) Estimating the Growth of the Business:
We can represent a significant judgment about the business growth by analyzing data of two or more years of a business entity. Improvement of sales with a concurrent increase in the profits symbolizes a good indication for the growth of the company.

(iv) Assessing Financial Soundness of Business:
Financial statements assist the entity in determining the stability of the business and help to answer various aspects of whether it is capable of purchasing assets from its sources and whether the company can repay its external liabilities as and when they are payable. These statements also produce information associating with the company's cash flows. Investors and creditors can utilize this data to predict the company's liquidity and cash necessities. They assist the credit rating agencies in determining the rating of the company.

(v) Constructing Comparison and Selection of Proper Policy:
Financial statements assist the management in choosing the sound business policy by creating an inter-firm connection. They also serve readers of these statements to acknowledge the accounting policies used in them. They promote decisions regarding the changes in the method of acquisition, utilization, protection, and sharing of limited sources. They present essential data to the government for making proper decisions associating with duties, taxes, price control, and for some legal and control objectives. They also provide crucial data and information to the managers for in-house reporting and the formulation of overall strategies.

(vi) Forecasting and Preparation of Budgets:
They provide standards for the differences between the actual and budgeted performances. They present essential information for forecasts. The financial statement furnishes information about the business irregularities so that the management can take remedial measures to eliminate these weaknesses. Financial statements assist the administration in making a forecast and preparing budgets in a useful manner.

(vii) Interacting with Various Parties:
They furnish certain information about the financial activities to the engaged participants. Financial statements are developed by the entities to report with different parties about their financial situation. Hence, it concluded that knowing the fundamental financial statements is a necessity for successful commercial enterprise administration. They help evaluate the firm's earning potential by providing a statement of financial position, a statement of periodical earnings, and business activities to the various involved persons. They also protect the interest of shareholders who are not allowed to go through the firm's day-to-day operations.

Conclusion
Financial statements are a significant factor in assuring that the business's actual financial picture is shown to management and external stakeholders as it opens a window for the public and educated.

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