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The Usefulness of Financial Statements

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The Usefulness of Financial Statements

The primary means of communicating the financial effects of organizational activities and transactions of a company to outsiders is the financial reporting system. This reporting system includes communicating financial information through annual financial statements, as well as through reports filed with the Securities and Exchange Commission, voluntary forecasts, and other financial and nonfinancial releases. Financial statements are the main source of financial information conveyed to parties external to the company. The full set of primary financial statements consists of a balance sheet, income statement, and statement of cash flows. External financial statements have a general purpose and are designed to meet the needs of investors, creditors, and other users of the external reports. They are historical in that they communicate activities and events that have already occurred.

Financial statements are prepared on an accrual basis; they measure the impact of events and transactions when they occur and not simply when the cash consequences of such events and transactions are realized. Financial statements are useful in evaluating an enterprise's profitability, liquidity, and long-term solvency and equity structure. An analysis is conducted from the perspective of external users of financial statements and it relies on the annual report of a corporation and other publicly available information. Management, of course, also has access to extensive internal financial data, and their concerns extend to subdivisions of the enterprise, such as the performance of subsidiaries, divisions, departments, and operating functions.

External reports are intended primarily for stockholders, creditors, directors, and regulators such as the SEC. Although externally reported information is also useful to corporate management at the highest level, it is far too aggregate to be useful for decision making by lower levels of management. And even top levels of management need financial information for decision making with respect to the performance of the various components or segments of the enterprise.

It is vital that managers understand how their corporation organizes itself and at what levels the various functions such as manufacturing, marketing, finance, and research and development are performed. Managers ...

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...d profits. It is seldom possible to form a judgment about the performance of an individual segment or division by inspecting the records of only that segment or division. All financial information must be analyzed together to serve useful in and out of a corporate entity.

Works Cited:

Financial Accounting Standards Board, 1978, Statement of Financial Accounting Concepts No.1: Objectives of Financial Reporting by Business Enterprises (Stamford, CT., Financial Accounting Standards Board).

Financial Accounting Standards Boards, 1984. Statement of Financial Accounting Concepts No.: Recognition and Measurement in Financial Statements of Business Enterprises

(Stamford, CT.: Financial Accounting Standards).

American Accounting Association, 1957. Accounting and Reporting Standards for Corporation Financial Statements and Preceding Statements and Supplements (Iowa City, Iowa: American Accounting Association).

Parker, R.H., 1979. Evolution of Corporation Financial Reporting (Nigeria, Africa: Thomas Nelson and Sons Limited).

Gray, S.J., 1984. Information Disclosure and the Multinational Corporation (New York, New York: John Wiley and Sons).
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