The Importance and Uses of Financial Statements

Money is the lifeblood of every business. Without it, a company will not have a building, furnishings, machines, or raw product from which to manufacture their product or even pay employees. Often, companies use a credit agreement with the suppliers or the company gets loans, or sells shares in the company in order to generate the cash needed to operate the business. Without some method of verifying the company’s ability to stay in business long enough to pay these debts and pay the employees, internal and external users have no way of knowing if this would be beneficial to both sides. Financial statements are important tools for any business because they help internal users make decisions that will affect the company and assist external users decide if the company is worth supporting.

Investors, creditors, and management each want to know financial information pertaining to the company. Financial statements give information on the liabilities, assets, expenses, and revenues to aid in the decisions made by each group. The income statement shows revenues, expenses, and whether the company is surviving or failing. Retained earnings statements calculate the amount of income kept after any dividends are paid or changes made along with explaining those changes or dividends. According to Financial statements (2002), the balance sheet is a detailed financial picture of the company. It details the assets, liabilities, and stockholder’s equity. A cash flow statement details all of the financial activity pertaining to the company’s operating, investing, and financing. Each of these statements provides the investors, creditors, and management with the information they need.

External investors, such as banks or suppliers use a company’s financial statements to determine if lending money or selling on credit is going to be a worthwhile venture. Creditors and suppliers use this information in order to reassure themselves that the money lent or credit given will be repaid in a timely manner. Investors use this information to determine if the money they invest in the company ultimately will make them money. They want to see if the company is growing or dying before they agree to buy stock. Regulatory agencies such as the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) use financial statements to ensure companies are