Financial statements are projections of an enterprise’s progress and they entail drafting of balance sheets and profit and loss declarations. They are used to create an impression of an organization to the outside world. These statements are very important because they are referred to during acquisitions and mergers.
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When managers want to get a glimpse of the condition of the organization, they refer to these statements because by doing so they can get clear information regarding the trend of the organization. The statements are indicators of when things are not going well most probably due to losses incurred or reduced sales.
When an organization is making profits, it is these statements that still imply so. But for the statements to be valid they have to be verified by an independent auditor to determine whether what is on paper corresponds with what is on the ground. The statements are used by managers when making decisions because they help them in budgeting by checking the money that is available and expected proceeds.
According to Wang (2010), financial statements are also reliable tools for the government because they are used to tell the amount of taxes that an organization should pay. Without these statements, it would be difficult for governments to dictate the taxes payable by any given organization because taxes are allocated according to the proceeds of an organization. This is why governments are very strict about these statements especially to publicly owned institutions.
In addition, financial statements are very useful because they are analyzed by financial institutions before granting a loan to any organization since they are the ones that tell whether an organization will be able to repay the debt in a good time. Without these statements, it would be difficult for organizations to convince creditors to lend them money by word of mouth. When budgets are being drafted, financial statements help in planning for expenses because they portray the money that is at hand hence when decisions are being made they are referenced to make sure that the decision made by managers will be successful.
Managers should recommend business alternatives based on financial analysis because the statements are the ones that report on the losses and profits made hence making decisions without referring to financial statements can be misleading. Financial statements enable the organization to make decisions based on what it has because the statements enable the managers to identify the strengths and weaknesses of an organization.
Correla et al. (2007) argue that when an organization understands its strengths it will be able to make good use of them to gain more proceeds than when the strengths are not known. The weaknesses include the mistakes that were made and financial analysis helps to identify them and thus the organization will identify the strategies that need to be employed to ensure that the same mistakes are not repeated in the future.
When weaknesses and strengths are not known decisions may not be effective. For instance, by referring to financial statements an organization can determine why there were reduced sales and come up with ideas that are derived and guided by the statements. For example, when an organization is making plans to get another loan when there is already an existing debt that is yet to be repaid, the statements will explain why getting another loan is appropriate or inappropriate.
If managers ignore the financial statements the ideas that they will implement may overwhelm them later because they did not consider past events. Ignorance can cause mistakes to occur again and again at the expense of the organization and since financial managers are the most knowledgeable about money matters they should counsel the organization on when to make moves and when to remain on hold.
Moreover, the value of any monetary property is essential in determining the financial status of a business. Ricceri (2008) explains that present and future values are very important in management because they determine the appropriateness of an investment. The present value is the worth of a currency that is bound to change in the future due to various reasons such as a decline in the economy. The change can be either positive or negative hence the probability of making profits is dependent on the current and future value of a currency.
If this year an organization ventured into another field the current value will be referred in the future to determine whether the organization has made any proceeds. For instance, if five dollars are enough to buy a book today because the value of the currency is high and in future, the value of the dollar goes down the consumer may have to add a few more dollars to purchase the same book that he/she once bought at five dollars.
If an organization has long term projects it will consider future values when making budgetary allocations because the changes in currency worth mean that the money that is adequate today to fund a project till completion may not be enough in the future due to changes in commodity prices. This applies to current assets because their current value is subject to change such as in the stock market where the prices of shares can rise or fall drastically.
This means that organizations have to make investments in permanent assets such as land which hardly depreciate in value. Investing in such assets cautions an organization against losses that would be incurred when the future value changed in other assets.
In essence, it is important for companies to present accurate financial statements with the aim of improving their overall image with regard to business operations. Besides, present values and future values are used to determine how interests in the future will be beneficial to the organization. Furthermore, when loans are being issued the interest rates are analyzed with probable future changes to determine whether its logical or not to apply for a particular loan.
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Correla, C., Flynn, D., Uliana, E., & Wormald, M. (2007). Financial Management. Cape Town: Juta & Company.
Ricceri, F. (2008). Intellectual Capital and Knowledge Management: Strategic Management of Knowledge Resources. New York: Routledge.
Wang, X. (2010). Financial Management in Public Sector: Tools, Applications, and Cases. New York: M.E.Sharpe Inc.