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Briefly explain the importance of preparing financial statements.

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Significance of Financial Statement :The users of financial statements include Shareholders, Investors, Creditors, Lenders, Customers, Management, Government, etc. Financial statements help all the users in their decision-making process. They provide data about general purpose needs of these members. 

The various uses and importance of financial statements are as follows. 

(i) Reporting to the Share Holders: Financial statements report the performance of the management to the shareholders. The gaps between the management performance and ownership expectations can be understood with the help of financial statements. 

(ii) Basis for Fiscal Policies :The fiscal policies, particularly taxation policies of the government, are related with the financial performance of corporate undertakings. The financial statements provide basic input for industrial, taxation and other economic policies of the government. 

(iii) Basis for Granting of Credit: Corporate undertakings have to borrow funds from banks and other financial institutions. for different purposes. Credit granting institutions take decisions based on the financial performance of the undertakings. Thus, financial statements form tf\e basis for granting of credit. 

(iv) Basis for Prospective Investors :The investors include both short-term and long-term investors. Their prime considerations in their investment decisions are security and liquidity of their investment with reasonable profitability. Financial statements help the investors to assess long term and short-term solvency as well as the profitability of the concern. 

(v) Aids Trade Associations in Helping their Members: Trade associations may analyse the financial statements for the purpose of providing service and protection to their members. They may develop standard ratios and design uniform system of accounts. 

(vi) Helps Stock Exchanges: Financial statements help the stock exchanges to understand the extent of transparency in reporting on financial performance and enables them to call for required information to protect the interest of investors.

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