Why Are Financial Statements Important for Companies?

As a business owner, surely you often hear about the company’s financial statements . This is part of the company and business owners cannot underestimate the company’s financial statements. Financial statements are important company documents that cannot be missed. Each company uses financial statements to see how the company’s condition during a certain period.

Financial statements have some data in it such as invoices, receipts, credit notes, reports, banks and so forth. The data source is processed to become clear and detailed financial reports. Every transaction data that is recorded will be a proof of the validity of transactions in the business for a certain period. So it can be concluded that the financial statements are reports that provide information about the financial condition of a company within a certain time period.

Components in Financial Statements

In a company’s financial statements, it contains important data such as assets, liabilities, expenses, net worth, income and also changes in equity and cash flow. Here are each of the explanations:

  • Assets Assets are all rights that can be used in company operations. Usually the assets contain company buildings, land owned by companies, etc.
  • Liabilities Liabilities include current debt, long-term debt, employee salaries, as well as retirement benefits for employees.
  • Equity Equity is the available capital to be distributed to shareholders. Equity Value consists of residual assets of an entity after deducting liabilities.
  • Cash flow Contains data on the inflow and outflow of company money.

In the opinion of Munawir (2010: 5), financial statements generally consist of balance sheets and profit and loss calculations and also changes in the equity of an entity in the balance sheet consisting of data on a number of assets and liabilities of a company and also the equity of a company in a certain period. While in the profit and loss section contains various results and also company expenses that were achieved.

Reasons Why Company Financial Statements are Very Important

Financial statements are important company documents that state the financial condition of a company, there are many reasons why financial statements are very important. Both for the company and for other parties. Here are the reasons why a company’s financial statements are very important:

  1. Provide clear information about the company’s financial condition , for potential investors who want to invest in the company. By knowing the company’s financial condition, investors can determine how the company is managed and how the company’s performance. So investors can calculate how much profit can be taken when investing in the company.
  2. From the customer’s point of view , financial statements can be a guide to trust with a company. If the customer is bound by a long-term contract, a stable financial report means the company is running smoothly and the company is in safe condition. But if the financial statements fall apart and the company suddenly has to declare bankruptcy or bankruptcy, customers with long-term contracts will be harmed for this case.
  3. For company employees , the financial statements inform the company’s condition. Since the employees who work at the company depend on the salary of the company, with a stable financial report, of course, employees will trust the company more. Employees also feel at home working in the company.
  4. For shareholders , companies with stable financial conditions will certainly be more trusted. For shareholders, if a company has a stable and good financial condition, it means the opportunity for high value shares is a good opportunity. Conversely, if a company’s financial condition is unstable, this makes shareholders worry about losing money.
  5. For the company itself , the financial statements become an evaluation of the company’s financial condition. From the company’s financial statements, it can be seen which assets are valuable, which products are the highest sold to those that are less liked by the market. With this data, companies can take steps in the next period. For example, by improving products that are less liked by the community so that they are more acceptable to the community in the future.

This report has many benefits for anyone associated with the entity. Therefore, this report is an important document that cannot be underestimated for the transaction recording process. Every transaction data recorded must be recorded accurately and in detail so that there are no mistakes when making financial statements. In addition to some of the reasons above, financial statements can also be considered important for reasons of the following functions:

  • Helping companies assess the financial condition of the company in a certain period.
  • Presenting comprehensive information or data about the company’s financial position. For example like a review of the company’s overall condition or a review of the company’s specific financial condition.
  • As a consideration in making important company decisions. Especially decisions relating to corporate finance or the survival of the company.
  • Creating new things for companies to improve the quality of company performance.
  • The credibility of the company also increases because companies with stable and good financial reports mean successfully managing the company, especially finance well.

Having a report provided by the company management will greatly help the shareholders in the decision making process, and is very useful in seeing the current situation or used as a tool to predict future conditions.

Making this report is an important part of the company. There are so many benefits from financial statements for companies, employees, even customers and shareholders. Companies that are able to manage finances well have good management. That way, the company’s performance and credibility are more trusted by anyone who collaborates with the company.

 

by Abdullah Sam
I’m a teacher, researcher and writer. I write about study subjects to improve the learning of college and university students. I write top Quality study notes Mostly, Tech, Games, Education, And Solutions/Tips and Tricks. I am a person who helps students to acquire knowledge, competence or virtue.

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