State the reasons why companies prepare financial statements and accounts. Comment on their usefulness.

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Financial statements are a set of final accounts prepared by the company’s accountants which includes the trading and profit and loss accounts and the balance sheet. These statements are then used by the Management team, Banks, Investors, and Government Departments etc. for different purposes.


Firstly, the managers of the business will want to know how things are going. They need financial information in order to plan for the future; they need more up-to-date information in order to check whether actual performance is on target. This process is known as controlling the costs and finances. In accounting, it is known as management accounting. So, management accounting is done by the accountants for the managers, for the purposes of planning, controlling and measuring the successfulness of the business.


Secondly, there are several groups of people who may have an interest in the finances of the business. The law says that they have a legal right to certain information. An example of this can be Banks, where a business hopes to get permission for an overdraft or when they apply for a loan. In this case the bank manager would like to know how much the assets would sell for if the firm ceased trading. He could then see what the possibility would be of the bank obtaining repayments of its load. Similarly, other people would also like to see the information in the way that is most useful to them. The whole process of providing this information (and of maintaining a book-keeping system capable providing it) is known as financial accounting and the interested parties are often referred to as stakeholders.


Specifically, there are many other advantages of these statements as they disclose a lot about the business and its function. The Profit and Loss statement summarizes the enterprise’s revenues, expenses, gains, and losses. Revenues are transactions that represent the inflow of assets as a result of operations�that is, assets received from selling goods and providing services. Expenses are transactions involving the outflow of assets in order to generate revenue, such as wages, rent, interest, and taxation. In addition to disclosing revenues and expenses, the profit and loss statement also lists gains and losses from other kinds of transactions, such as the sale of fixed assets (for example, a factory building) or the early repayment of long-term debt.


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On the other hand, the balance sheet relates to an entity’s value. It provides information about an organization’s assets, liabilities, and owners’ equity as of a particular date. The format of the balance sheet reflects the basic accounting equation assets equal equities. Assets are economic resources that provide potential future service to the organization. Equities consist of the organization’s liabilities together with the equity interest of its owners.


Nevertheless, there is one more prime source of information which can be classified as financial statement is - The cash-flow statement. This statement provides information not otherwise available in either a profit and loss statement or a balance sheet; it presents the sources and the uses of the enterprise’s funds by operating activities, investing activities, and financing activities. The statement identifies the cash generated or used by operations; the cash exchanged to buy and sell plant and equipment; the cash proceeds from issuing shares and long-term borrowings; and the cash used to pay dividends, to purchase the company’s outstanding shares of its own stock, and to pay off debts.


To conclude, Financial Statements provide the stakeholder with numerically presentable data which, can be helpful in evaluating the Accounting Ratios with that of the previous year. However, it still lacks the important information such as how well trained staffs the business has or if the workers are motivated or not.





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