What is the purpose of financial statements?

The purpose of financial statements is to offer a structured representation of the financial performance and position of a business. This involves compiling comprehensive information about assets, liabilities, equity, revenues, and expenses into readable formats such as the balance sheet, income statement, and cash flow statement. These documents provide stakeholders—including investors, management, creditors, and regulatory agencies—with crucial insights into the financial health of the organization. Properly prepared financial statements are essential for making informed business decisions, assessing financial stability, and identifying trends over time.

While breakdowns of employee salaries and tax payments are important for management and regulatory purposes, they do not broadly represent the overall financial state of a business. Additionally, while comparing a business with industry peers is valuable for benchmarking performance, it is not the primary function of financial statements themselves. Financial statements are critical tools for analysis and decision-making, serving to summarize and standardize financial data for stakeholders' understanding and evaluation.