Why Accurate Financial Statements are Important for Outside Business Interests

Preparation of accurate business reports is important both for internal and external users. Whereas internal reporting helps the management to make prudent decisions in such aspects as determining the most prudent investment to make among alternatives, products to manufacture where there are resource constraints, or whether to outsource or manufacture a component in-house, financial statements are critical for various users external to the firm. The financial statements are prepared in accordance with a set of principles (GAAP) and standards (IFRS) that discloses the basis of preparation of such statements and ensures comparability and accurate treatment of component items (Reimers, 2005, pp.12-13).

To report its financial position and operations, a firm uses four statements – the balance sheet, the income statement, statement of changes in shareholders’ equity and a cash flows statement (Reimers, 2005). Users of such financial statements external to the firm include investors, lenders and governments. Financial statements however contain information critical to persons internal to the organizations such as employees who, for instance, are interested in the performance of the firm to gauge the ability of the firm to provide benefits and bonuses. The subject of this paper is to highlight the importance of accurate financial statements to the users external to the business, and will focus on such importance for investors, lenders and the government. Go to part 2 here.

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