Question

Explain the purpose of the worksheet.

Why is it necessary to prepare formal financial statements if all of the data are in the statement columns of the worksheet?

Answer 1

The main purpose of the worksheet is to help prepare the financial statements for the year before any journal entries are done for the transactions happened during the year and any adjusting entries. Completed worksheet is NOT a substitute to formal financial statements. It acts as an input or a working file to help an accountant get the relevant information needed to prepare formal statements.

It is necessary to prepare formal financial statements even if all of the data are in the statement columns of the worksheet due to the following reasons:

1. Mandatory requirement - If it is a public company, it is mandatory as per the Securities and Exchange Commission to prepare the formal financial statements on a regular basis generally yearly as per the GAAP (Generally Accepted Accounting Principles).

2. Comparison purposes - Formal financial statements have a proper format of preparing the statements which needs to be consistent year to year unless there is a valid reason to change. This makes it easier to compare the statements from previous years of the same company or the comparison with competitors or industry wide comparison.

3. Stakeholders - Financial statements is exhaustive and provide relevant information to all the stakeholders such as Shareholders, management, investors, customers, government institutions, banks, market analysts, etc. for various purposes. There is a desire for Balance Sheet which shows the financial position of the company, Income Statement which shows the profitability of the business activities during the year and Cash flow statement which expalins how the cash moves during the year and how use. There are also Notes to accounts which explains about the future plans/projects of the company, contingent liability, past activities, etc. which gives a good insight into the business operations.

4. Other benefits - Formal statements are easier to understand and provide clear and consice information. It saves time if we are looking for some particular information rather than looking into the combersome worksheet and search for it.