Why is financial statements important

List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Understanding Financial Statements.

Profitability Ratios. Liquidity Ratios. Debt Ratios. Efficiency Ratios. The Bottom Line. Key Takeaways Financial statements provide a snapshot of a corporation's financial health, giving insight into its performance, operations, and cash flow. Financial statements are essential since they provide information about a company's revenue, expenses, profitability, and debt.

Financial ratio analysis involves the evaluation of line items in financial statements to compare the results to previous periods and competitors. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. Ratio Analysis Ratio analysis refers to a method of analyzing a company's liquidity, operational efficiency, and profitability by comparing line items on its financial statements. What Are Liquidity Ratios? Liquidity ratios are a class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital.

Why the Interest Coverage Ratio Matters The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. What Is the Current Ratio? Investopedia is part of the Dotdash publishing family. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. Keeping the broader health of your organization in mind is vital when managing your team.

When setting team goals, leverage financial statements to provide context for why specific benchmarks were targeted and the thought process behind your plans for reaching them. Instill in employees your same big-picture mindset and the knowledge that their efforts make a tangible difference to the company. Bolstering your financial knowledge can enable you to make the best use of the resources available to you and become a finance-driven manager.

Are you interested in using finance to become a better manager? Explore our six-week online course Leading with Finance and other finance and accounting courses and discover how you can gain the skills and confidence to use the fundamentals of finance in your career.

When reviewed over multiple time periods, the income statement can also be used to analyze trends in the results of company operations. The purpose of the balance sheet is to inform the reader about the current status of the business as of the date listed on the balance sheet. This information is used to estimate the liquidity , funding, and debt position of an entity, and is the basis for a number of liquidity ratios.

Finally, the purpose of the statement of cash flows is to show the nature of cash receipts and cash disbursements , by a variety of categories. This information is of considerable use, since cash flows do not always match the sales and expenses shown in the income statement. As a group, the entire set of financial statements can also be assigned several additional purposes, which are:.

Credit decisions. Lenders use the entire set of information in the financials to determine whether they should extend credit to a business, or restrict the amount of credit already extended.

Also, the information listed on the income statement is mostly in relatively current dollars, and so represents a reasonable degree of accuracy. Financial statements are written records that convey the business activities and the financial performance of a company.

Financial statements are often audited by government agencies, accountants, firms, etc. Financial statements include: Balance sheet. On a balance sheet, liabilities and owner equity are combined to equal all assets.

Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Income statement. Cash flow statement. The financial statements of a company reflect a true picture of its financial performances. They depict not only profits and losses, but also assets and liabilities. It is only at the end of all accounting processes that we can generate these statements.

The three primary financial statements are the income statement, the balance sheet and the statement of cash flows. Brief: There is no need of detailed information in financial statements.