Why financial statement is important?

  1. Financial Transparency:

    Even the smallest numbers in a balance sheet can have a huge impact on the business. Assets never have the same value that they did when they were first purchased. A percentage has to be deducted from their value for depreciation. A company might report a certain number as revenue earned. But how much of it is actual cash and how much of it is accounts receivable has to be accurately stated. Numbers like Profit before Tax, Profit after Tax, and Profit after Interest, Depreciation and Tax are all important numbers that tell shareholders and management a lot.

  2. Evaluate Tax Liability:

    Corporate tax rates are quite high. When companies make a lot of profit, the taxes they have to pay are equally high. The owners often get astonished at how little they have left once they have paid taxes to the government. Can they reduce their tax burden? If yes, then they will need the most accurate financial numbers possible. Otherwise, all their resources could be depleted in a very short time. Conversely, for the government, accurate financial statements are essential because many firms fudge their reports only to avoid paying tax.

  3. Mitigate Errors:

    Accurate financial statements are also essential to catch costly mistakes or internal wrongdoing early on in the process. If any illegal activity is taking place, there is no better way to catch it than through discrepancies in the numbers. If an error has been made, reconciliation activities can find them. That is why companies spend a lot of time on reconciling their books of accounts and checking each entry so that they can find if anyone has tampered with any part of the business or an accounting error has been made.

    Investment banking especially has been prone to many accounting misdeeds over the years to cover huge trading losses. The inefficiency of the financial reporting systems allowed those losses to be hidden. That is why regulators have started asking banks and other trading firms to pay more attention to their internal accounting methods.

  1. Build Trust:

    More than anything else, accurate financial statements induce trust in the company. Investors need a sign that a company is doing well and they can put their hard earned money in its business. It is all very well if the balance sheet shows a profit. But there have been times when the balance sheet of many companies showed a profit, only to be found later that they were actually hiding losses. Large-scale companies like Enron and WorldCom and successful accounting firms like Arthur Andersen had to be closed because of their role in fudging financial statements. After experiences like that, it is little wonder then that the world is more concerned about accurate financial statements than ever before. Governments have made accounting and compliance rules more stringent, so that companies do not feel tempted to misreport their financial numbers.

  1. Improved Payment Cycles:

    In order to optimize the Accounts Payable and Accounts Receivable cycles, accuracy of financial statements plays a key role. Other outgoing payments include salaries and daily wages that need to be paid (payroll), dividends need to be given to the shareholders, inventory needs to be managed, and creditors need to be paid. All this cannot be done unless the numbers are in order. If a loan is overdue then the company needs to know how much interest has to be paid or received. Mathematical calculations can only be done with the correct figures.

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