Question 2: Explain in detail about the significance of the financial statements.
Answer:
The importance of financial statements is mentioned below:
1. Provides Information: Financial statements provide information to various
accounting users both internal as well as external users. It acts as a basic platform for different accounting users to derive information according to varying needs. For example, the financial statements on one hand help the shareholders and investors in assessing the viability and return on their investments, while on the other hand, the financial statements help the tax authorities in calculating the
amount of tax liability of the company.
2. Cash Flow: Financial statements provide information about the cash flows of
the company. The financial statements help the creditors and other investors.in
determining solvency of company.
3. Effectiveness of Management: The comparability feature of the financial
statements enables management to undertake comparisons like inter-firm and
intra-firm comparisons. This not only helps in assessing the viability and
performance of the business but also helps in’ designing policies and drafting
policies. The financial statements enhance the effectiveness and efficacy of the
management.
4. Disclosure of Accounting Policies: Financial statements provide information
about the various policies, important changes in the methods, practices and
process of accounting by the company. The disclosure of the accounting policies
makes financial statements simple, true and enables different accounting users to understand without any ambiguity.
5. Policy Formation by Government: It needs information to determine national
income, GDP, industrial growth, etc. The accounting information assist the
government in the formulation of various policy measures and to address various economic problems like employment, poverty etc.
6. Attracts Investors and Potential Investors: They invest or plan to invest in the
business. Hence, in order to assess the’viability and prospectus of their investment, creditors need information about profitability and solvency of the business.
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