Financial statements (or financial reports) are formal records of a business' financial activities. It is a collection of data organized accordingto logical and consistent accounting procedures. These statements providean overview of a business' profitability and financial condition in bothshort and long term.A sound understanding of financial statements helps you:Identify unfavorable trends and tendencies in your business's operations(for example, the unhealthy buildup of inventory or accounts receivable) before the situation becomes critical.Monitor your cash flow requirements on a timely basis, and identifyfinancing needs early.Monitor important indicators of financial health (for example, liquidityratios, efficiency ratios, profitability ratios, and solvency ratios).Monitor periodic increases and decreases in wealth (specifically, owners'or stockholder’s equity).Monitor your performance against your financial plan, if you havedeveloped one.
According to John N. Myer “the financial statements provide a summaryof the accounts of a business enterprise, the balance sheet reflecting theassets and liabilities and the income statement showing the results of operations during a certain period”
OBJECTIVES OF FINANCIAL STATEMENTS:
The primary objective of financial statements is to assist in decisionmaking. The Accounting Principles Board of America (APB) states thefollowing other objectives: