Role, objectives and limitations of published Annual Financial Statements

Running Head: Accounting Statement Analysis
FINANCIAL STATEMENTS

Accounting Statement Analysis 1
Role, objectives and limitations of published Annual Financial Statements
Annual Financial statements contain the summary of all the transactions and events that takes
place in as particular year which provides the true picture of the financial position as well as the
financial performance of the reporting entity. The process of preparation and presentation of
financial statements is termed as the financial reporting function of an entity. Reporting entity is
the firm that prepares and presents their financial statements and publishes them so that they can
be used by the stakeholders of such companies in their decision making function in the areas in
which they are associated with the reporting entity. The information contained in financial
statements are communicated to the intended users by way of annual reports which is comprised
of various statements such as income statement, statement of financial position, statement of
cash flows along with the notes to accounts that provides details of the information contained in
such statements.

Accounting Statement Analysis 2
(Source: Saylor, 2016).
A financial statement serves an important tool for the entity’s owners, investors and
regulators in determining its true financial position. They provide necessary and relevant
information to such parties to help them in undertaking sound and effective decision making
(Schroeder, Clark & Cathey, 2001). The financial information in relation to an entity’s business
is structured in the financial statements in such a way that the users can easily understand it. An
entity’s financial statements must be prepared and presented in accordance with the Generally
Accepted Accounting Principles (GAAP) or in accordance with the International Financial
Reporting Standards (IFRS) (Callao, Jarne & Laínez, 2007). For each stakeholder group
financial statements play different roles. For existing and potential shareholders and investors,
these statements provide them insights about the profitability position of the company so that
they can determine the level of returns they can earn by investing in such company. Only a
profitable entity can offer sound returns to its investors and owners. For the banks and financial
institutions, financial statements serve as the basic documents to assess the financial health of the
company and its credit worthiness by evaluating its solvency position (Suh, 2017). The
governmental regulators bodies refer to these statements to check as to whether the reporting