What is the main purpose of preparing financial statements?

The main purpose of preparing financial statements is to provide an overview of the company’s financial performance to stakeholders. Financial statements, which include the balance sheet, income statement, and cash flow statement, are vital tools that summarize a company’s financial position and performance over a specific period. These statements are essential for a variety of stakeholders, including investors, creditors, management, and regulators, as they provide insights into profitability, liquidity, and overall financial health.

Stakeholders use financial statements to make informed decisions. For investors, these documents help assess the potential return on investment. For creditors, financial statements indicate the company’s ability to repay loans. Management uses this information for strategic planning and operational decisions. Therefore, the functionality of financial statements extends beyond mere compliance or tax calculations; they serve as a critical communication vehicle regarding a company’s financial situation to all interested parties.