Why owners use financial statements

The financial statements are written reports used by market analysts, investors, and creditors to evaluate a company's financial health and make decisions regarding the allocation of resources.

All of these data are examples of financial statements because fundamental analysts rely on these documents to evaluate institutions that are making good investments. Financial statements aim to provide integrated information about the results of operations, the financial position and cash flows of the organizations.

Data analytics use this information and make financial decisions regarding resource allocation, etc. This provides an opportunity to use it to analyze trends in the results of enterprise operations.

The balance sheet in the financial statements shows the current state of business activity as of the date on which the budget was listed, and enables reading of the data to estimate the liquidity, financing and debt position of the enterprise. Cash flows in the financial statements show the nature of cash receipts and expenditures. Cash flows have a great benefit because they always match the revenues and expenses shown in the income statement.

We can say that financial statements are very important because they provide essential information about a company's income, expenses, profitability, and debt. Financial statements provide comprehensive information about the financial position of institutions and the changes that occur in their financial position. This information guides a wide range of users in economic decisions, whenever the data is understandable, relevant, reliable and comparable.

Business owners and managers need financial statements to make important business decisions. And financial analysis is performed on the financial statements, to provide management with a clearer understanding of the entities. Financial statements are one of the most important elements in a business environment. The double-entry accounting system requires the accounting equation to stay in balance as transactions post.

Balance sheet accounts calculate working capital and other important ratios. Review the balance sheet for Centerfield Sporting Goods as of December 31, An income statement connects to the balance sheet through the net income account.

A company can generate its income statement using the income statement formula, which subtracts revenue from expenses to determine net income. Income statement accounts are known as temporary accounts because the account balances adjust to zero at the end of each month and year. However, balance sheet accounts are permanent. The ending balances carry from one month to the next.

At month-end, the books close, and all revenue and expense accounts adjust to zero. The net impact of the income statement activity posts as net income on the balance sheet and increases the equity balance.

It provides information relating to returns on investments, risks, financial flexibility, and operation capabilities. The income statement formula generates an income statement. Most companies produce a multi-step income statement, which documents how a firm produces net income. In a multi-step income statement, you first find your gross profit then your operating income for a period of time. Most of your business activity will flow through gross profit.

Your material, labor, and overhead costs post to the cost of goods sold account. But you also incurred expense line items—advertising costs, sales commissions, and home office costs—to operate your business in May. You can generate operating income from the day-to-day business activities. Your business must produce a majority of its net income from operating income activities because operating income is sustainable.

Non-operating income is inconsistent and unpredictable. No company can rely on it to produce annual profits. Since the company did not generate any non-operating income, its operating income was its net income balance. Cash flow separates into three categories. Most of the cash activity in a business takes place in the operating category. When an accountant generates the cash flow statement, they should identify the investing and financing transactions first.

All remaining cash activity is in the operating category. The statement of cash flows adds all cash inflows and outflows to find the net change in cash for a period. Ultimately, the best way to increase the accuracy and dependability of your financial statements is to automate the process wherever possible. Using accounting software, for example, leverages technology to handle all the number crunching.

Are you interested in using finance to become a better manager? Explore our six-week online course Leading with Finance and other finance and accounting courses and discover how you can gain the skills and confidence to use the fundamentals of finance in your career. Catherine Cote Author Staff. Determine Budgets Financial statements are also useful when managing and planning budgets. Think Big-Picture Keeping the broader health of your organization in mind is vital when managing your team.

Prior to joining HBS Online, she worked at an early-stage SaaS startup where she found her passion for writing content, and at a digital consulting agency, where she specialized in SEO. Catherine holds a B. When not at work, you can find her hiking, performing or watching theatre, or hunting for the best burger in Boston.