A financial statement is an official record of the financial actions of a business. The financial statements enable a business to set up the results of the operations it carries out over a given period of time and also helps the business to determine its worth at a given date. The financial statements are mostly prepared to assist the business people in evaluating the financial condition of their businesses. It is always essential to provide very specific financial statements at the request of a supplier or a banker. The tax returns need the financial statement of a business that is involved. The in-house monthly financial statements should be in a form that is acceptable and convenient to the management. The financial statements are very important because they are given to other outside parties and therefore should be in the required standard formats and follow their specific rules of their preparation.The managers and the owners need the statements in order to make the important business decisions which affect the continued operations of the business. They provide the management with detailed understanding of the cash figures and these statements are used as a part of the annual report delivered to all the stockholders. The employees require the financial statements because they help them in the making of collective bargaining agreements with their managers. The statements are important to the prospective investors because they assess the possibility of investing in the business through them. The financial statements are important to the financial institutions like banks in the decision making of whether to grant working capital or give debt securities to finance the business. Other vendors also need the statements to evaluate the creditworthiness of the business.
The financial statements include an income statement that shows the profit and loss over a given period of time. A balance sheet which is a summary of the equity, liabilities and assets of the business at a given date is also a financial statement. A Statement of Cash Flows is a financial statement and it summarizes the disbursements and receipts of cash during a given time. These help to show the owners and the management to find out how and where the cash is going and being used. A statement of retained earnings is a financial statement that explains the alterations in the business's retained earnings over the period of reporting.There are limitations of the statements that are used by the credit control personnel. The previous financial performance whether good or bad is not an important predictor of what would happen with the customers in the future. They ignore the inflationary trends and do not reflect the correct current worth of the business. Various qualitative elements are not included in the statements because they are immeasurable in monetary terms. There are items in the assets side which have no real value in the balance sheet. They are deferred charges to the future incomes. There is a probability of an overstatement of the accounting profit of a business.
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There are financial ratios that include: the leverage ratios that show the extent to which the debt is utilized in a company's capital structure. The other is liquidity ratios that give the picture of the business's short term financial solvency. The operational Ratios that make use of the margin analysis and then shows the return on the sales and capital employed. The other ratio is solvency ratio that gives the picture of the business's ability to produce cash flow and reimburse it financial obligations. The current ratio is calculated by dividing the current assets by the current liabilities.The common size ratios are widely used to compare the statements of the different-size business or of the same business over various periods. It is in proportion to some specified size-related measure where the standardized statements are created. The ratios are expressed as percentages to the reference amount. The financial are mostly preferred because they capture the health status of the firm and more information and it is quicker in making decisions. The standardized rate could be overstated or understated and therefore not preferred