Importance of financial statement

Answer 1

It depends on the financial statement. Generally speaking, a Profit-and-Loss statement will show how much money a business (or individual) made versus how much money was expended. A Balance statement shows what assets a business (or individual) has versus what liabilities it has. While these aren't the only two financial statements a business (or individual) could have, these are the main ones. They are important in documenting how successful (in terms of profit) a business or individual is at the point of the statements were created.

Answer 2

Pro forma statements are prepared in order to analyze a company's financial position under hypothetical circumstances. In the financial planning process, pro forma statements can be key to understanding what will happen to a company's financial position after a hypothetical event, like a change in regulatory environment, merger or acquisition, extraordinary event (like a natural disaster), or exogenous economic shocks. They can also be used to forecast how a company's financial position may evolve from a marketing campaign or restructuring, or how the company may grow in the future.

Answer 3

Effective financial statement analysis is critical to effective business management decision-making. Business decision making is both art and science. A business owner must pay close attention to numerical information included on income statements and balance sheets to understand what is working, and to avoid spending money he doesn't. Successful business planning involves balancing a range of variables and options, relying on experience and subjective judgments as well as firm numbers.

Company's marketing managers and credit managers use customers' financial statements to decide whether to extend credit to them for their purchases of products. Purchasing managers analyze financial statements of suppliers to judge whether the suppliers have the resources to meet company's demand for ingredients and to invest in the development of new ingredients. Both human resource managers and the employees' union use the company's financial statements as a basis for contract negotiations over pay rates. The net income figure even serves as a basis for computing employee bonuses. When firm's managers examine the financial statements of the company's customers and suppliers, they rely on these statements as the best source of financial information available to external users because they do not have access to internal financial information produced by their customers and suppliers. However, when they make internal decisions regarding company's operations, they rely on more detailed financial information obtained through the company's managerial accounting system.