Why Do We Need to Generate Financial Statements?

Why Do We Need to Generate Financial Statements?

One of the crucial facts that you should know before you start running a business is that you need to generate financial statements of your company for every financial year. This is what every business should do as the financial statements can portray the financial position and business performance of the company. With the help of these statements, you will be able to know how well your company has performed throughout the year and the steps that you can take to improve your sales or other achievements.

However, keep in mind that before you can generate financial statements, you need to make sure that you have recorded all the business transactions accurately under the applicable accounting standards (Also see Accounting Standards in Malaysia). You will also need to deal with other non-cash transactions like depreciation, as well as record accruals or deferrals if they take place. This is to make sure that the financial statements that you generate can reflect the condition of your business accurately. If you need help on this matter, the accountants from an accounting firm in Johor Bahru will always be by your side.

Apart from helping you to understand the performance and financial condition of the business, financial statements will also be able to help the investors as well as the company’s management to assess the economic decisions that the company should make. This can be achieved by comparing the company’s current performance with its performance in the past. Thus, they will be able to forecast its development and growth in the future.

The financial statements comprise of the income statement, balance sheet, cash flow statement, and lastly, the statement of change of equity. The income statement is a financial statement that presents the profit, loss, sales and expenses of the company. Hence, the investors will be able to assess the company’s performance and anticipate the cash flow of the company in future. On the other hand, the balance sheet lists the asset investments that the company has made as well as the amount of its liabilities and equity (Also see The Difference between Assets, Liabilities and Equity). This helps the creditors and investors to understand its financial position by looking at its balance sheet.

Besides, the cash flow statement illustrates the cash inflow and cash outflow of the business in a particular financial period. This tells the investors whether the company has sufficient funds for it to cover the purchases and expenses. The cash flow statement also divides the business activities that the company has carried out into three categories, which are operating activities, financing activities and investing activities. Thus, investors can understand the activities that the company has involved as a whole.

Another financial statement that we are going to discuss here is the statement of changes in equity. This statement is particularly important to the equity shareholders as they get to know the changes in the company’s retained earnings in the accounting period by looking at it. Compared to a company that has an increasing shareholder base, that is, a company with more and more shareholders, a company with stable growth in retained earnings is more sustainable.

In conclusion, financial statements are crucial as it helps the business as well as its stakeholders to understand its performance as well as financial position. It helps the management in various aspects. For example, the company will be able to manage its debts and liabilities, carry out trend analysis as well as track any problems that occur in business operation. In the long run, this helps the company to be more sustainable and be able to develop continuously.

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